What are real assets?
Canada Life - Sep 19, 2023
Diversifying your portfolio with real assets can help you achieve your financial goals and secure your future
What are real assets?
Real assets are physical or concrete assets with material value. They can generate income or increase in value over time. Unlike financial assets, real assets have a physical form and often have direct use. Real assets can include investments like real estate, natural resources and infrastructure.
Let’s take a closer look at some of them.
Real estate is one of the most popular forms of real assets. It can offer benefits like rental income, potential increase in value and diversification.
Real estate investments can include residential properties, commercial buildings or even vacant land. Different types of real estate investments have different benefits. For example, rental properties can generate steady cash flow, while properties in growing areas may increase in value over time.
Natural resource equities
Natural resources include oil, gas, minerals, timber, water and electricity.
Global population growth and ongoing industrialization increase the demand for these resources. This makes them potentially lucrative investment opportunities.
You can invest in natural resources directly or indirectly. Direct investing includes ownership of resource-rich land. Indirect investing includes buying stocks of companies that extract or produce resources.
Infrastructure assets include toll roads, bridges, ports, airports and utilities. They provide essential services to society. Investing in infrastructure can offer stable cash flows and potential long-term growth.
These investments can also make up for inflation because their generated revenue often keeps up with rising prices.
What’s the difference between real assets and financial assets?
The main difference is in their nature. Real assets:
- Are physical or concrete assets with built-in value
- Exist in the physical world
- Can generate income or increase in value over time
On the other hand, financial assets represent ownership or claims on financial instruments or contracts. These include stocks, bonds and mutual funds. Financial assets are more abstract and represent the potential for future cash flows or returns.
Both types of assets can be part of your portfolio. The advantages of real assets are:
- Concrete value
- Protection from inflation
- Potential income generation
The advantages of financial assets include:
- Liquidity, in other words, the ability to convert to cash
- Potential for capital to increase in value based on market performance
Should you consider real asset investments?
Let's dive deeper into why you should consider real assets for your portfolio.
When we compare real assets to traditional stock and bond investments, you can see they react differently to changes in economic factors. When you add real assets to your portfolio along with traditional investments, you can help reduce its volatility and enhance diversification benefits. This means investing in real assets can help support your long-term goals.
Managing inflation risk
Real assets are relatively sensitive to inflation. Inflation often positively affects their prices and revenues, so they can perform well in periods of rising or unexpected inflation. Inflation usually damages to traditional stock and bond returns.
Attractive total return potential
Investing in real assets can help you navigate market ups and downs. Different types of real assets have different strengths depending on the market cycle.
Historically, real assets have delivered attractive total returns over full market cycles. Attractive total returns could improve your portfolio’s risk-adjusted returns without sacrificing its long-term growth potential.
Real assets offer an alternative investment opportunity to financial assets that can enhance your investment portfolio. By diversifying into them, you may be able to benefit from income generation, protection against inflation and the potential for appreciation.
Are real assets right for you? The new Canada Life Diversified Real Assets Fund is a great option to consider1.
Want to learn more? Let’s chat!
1The Canada Life Diversified Real Assets Fund invests primarily in equity and fixed income securities of issuers located anywhere in the world which are expected to be collectively resilient to inflation. The fund seeks to achieve its investment objectives by allocating at least 70% of its net assets to real asset classes, including: natural resource companies; infrastructure companies; real estate companies, including real estate investment trusts (“REITs”); and commodities. The fund may also invest in certain short-term fixed income securities with the aim of managing portfolio volatility. The fund does not invest directly in physical assets but rather gains exposure to these real asset classes through other financial instruments.