Real Assets Emerge as Key Portfolio Diversifiers

As the Department of Labor’s proposed rule establishing a safe harbor for the inclusion of alternative assets in retirement plans reaches the end of its public comment period on June 1, advisers are reassessing the role of these investments. New research from Bank of America Corp. on the broader economic landscape highlighted emerging opportunities in real assets, suggesting timberland, farmland and commercial real estate—assets that are shifting from niche alternatives to strategic diversifiers—for long-term portfolios.

Bank of America’s specialty asset management insights report, “Anticipating Opportunities in Real Assets,” suggested that the real asset market provides a hedge against inflation and opportunities for new investors to grow their noncorrelated assets.

While the report also analyzed the energy market, investments in the three specific assets may be especially attractive for advisers, since they could provide diversification and a conveniently low correlation to certain equities, according to Ken Shepard, Bank of America’s head of specialty asset management and a co-author of the report.

 “In [Bank of America’s] most recent analysis, all three of these real asset categories exhibited virtually no correlation with U.S. large-cap equities,” wrote Shepard in an email to PLANADVISER. “This low correlation highlights their value as long-term portfolio diversifiers.”

Commercial real estate has “turned a corner,” according to the report, with values stabilizing following the 2022 market correction. As vacancies peak and forward supply pipelines slow down, CRE has become an attractive entry point for investors.

Farmland and timberland, however, are coming off cycle highs and are now experiencing decreases in value due to crop-specific supply excesses, inflation, shifts in regional dynamics and steady interest rates. Shepard still identifies opportunity in farmland and timberland returns, if advisers first consider clients’ other portfolio factors, such as income needs and return objectives.

“Farmland can generate consistent income through lease payments when rented to a farmer. This provides a relatively stable and predictable cash flow profile. In cases where income is tied to crop prices, return potential may be higher, but this also introduces greater variability and risk,” Shepard wrote. “Another example is timberland, which can create higher levels of income for a portfolio, however, with less predictability.”

In general, investment professionals remain cautious about incorporating alternative investments into retirement plans. Ahead of next week’s comment deadline, analysts at Aon PLC expected alts adoption to depend on legal risks.

“Aon values that the proposal may expand access to alternative investments, but the main barrier to plan sponsors adopting innovative solutions stems from ongoing litigation risk and uncertainty around how decisions will be judged over time,” wrote Ari Jacobs, Aon’s global head of investments, in an email to PLANADVISER.

Clearer regulatory guardrails will prove crucial to adoption.

“Without that clarity, expanded access won’t translate into better retirement outcomes for American workers,” Jacobs added.

While regulatory risks remain, the need for protection from volatility is increasingly relevant alongside current headlines of inflation and geopolitical tensions. Bank of America’s report pointed to the potential advantages real assets hold over traditional assets during periods of market stress.

“In periods of market stress, such as inflation spikes, many traditional asset classes can face short-term headwinds. However, certain real assets may benefit from these same conditions,” Shepard wrote. “By incorporating noncorrelated or less-correlated assets into a portfolio, advisers can create more resilient portfolios that are better positioned to navigate dynamic market environments.”