A research paper from J.P. Morgan Asset Management forecasts that institutional investor allocations to real assets will rise, from their current average of roughly 5% to 10%, to more than 25% of portfolios in the next decade. J.P. Morgan predicts real assets will move from an alternative to a mainstream asset class.
Low bond yields, along with outsized equity market volatility and modest equity returns, have brought us to a new asset allocation tipping point, the paper said. Global real assets—real estate, infrastructure, transport and natural resource assets that can provide higher income than bonds and superior risk-adjusted returns to equities—will increase in size and importance in investor portfolios.
Joe Azelby, chief executive of Global Real Assets at J.P. Morgan Asset Management, and co-author of the paper, is calling the shift “the realization,” as institutional investors are undergoing a structural shift realizing they will not be able to achieve the returns they need from fixed income and becoming increasingly disillusioned with equities, given the volatility and stunted returns of stocks over the last decade. Azelby thinks investors will be lured by the solid yields, stable total returns, inflation sensitivity and attractive diversification of real assets, causing them to fundamentally rethink portfolio construction.
The paper contends that investors who recognize and act on this realization in their portfolio allocations are likely to have better investment outcomes than those who do not.
The research paper will be distributed to J.P. Morgan institutional clients. More information is here.