“[To] achieve true diversification, DC plan sponsors now need to move beyond the practice of simply diversifying holdings within the traditional asset classes. By introducing ‘real assets’— assets such as commodities, real estate and listed infrastructure—in their DC investment menu, plan sponsors can better help participants achieve their goals,” Mark Teborek, defined contribution analyst, and Josh Cohen, defined contribution practice leader, wrote in the paper.
The paper says that in the past several years, Russell has observed an increasing supply of institutional-quality managers who invest in more marketable and liquid real assets categories, giving DC investors access to real assets in ways previously unavailable. The authors contend that stocks and bonds alone cannot be expected to always produce a long-term real return.
The main principles of the authors’ argument for including real assets in DC plans are:
- Real assets are typically under-represented in a typical portfolio, and their addition broadens portfolio diversification because of their modest correlation to a typical asset class;
- Real assets increase the potential to achieve a consistent real return above the rate of inflation over time; and
- Real assets provide a way to enhance potential long-term returns by taking advantage of global trends.
“Real assets for the defined contribution menu” can be downloaded here.