Pension plans have developed an appetite for real assets in recent years, but what does the term actually include?

In response to demands from asset managers for more information about real assets, the S&P Dow Jones Indices created a benchmark index for the area in 2015, said Jodie Gunzberg, the organization’s managing director of product management.

“We did some research about what might be inside of a real assets benchmark. And the attention was coming because of the growth in allocations to real assets as a whole,” she said at an event held by the CFA Society’s Toronto chapter on Thursday.

Read: Smaller plans need more investment solutions to vary the asset mix

What managers understand real assets to be isn’t necessarily cohesive yet, she says. BlackRock Inc., for example, defines them as real estate, infrastructure and commodities. The Bank of New York Mellon Corp., on the other hand, also includes real estate investment trusts and natural resource equities in the category.

“You can see that there are differences in the ways that managers view what real assets are. Most consider the physical real assets, the physical real estate, the physical timber, forests, gold, those things are pretty inarguably real assets,” she said. “But there’s also relatively high agreement that the listed version of these are also real assets. Two thirds of the industry do feel that listed commodities, real estate, infrastructure . . . fall into the real assets bucket.”

As such, identifying the specific assets in the class and interpreting their role in a portfolio is critical to using them successfully, said Gunzberg.

In building its benchmark index, S&P Dow Jones looked at everything that fall into the category and then cut out some types of assets based on price, availability and liquidity, she says. Private real estate, for example, doesn’t make the cut because it isn’t liquid enough and it doesn’t fit the criteria for price and availability.

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The index itself breaks down to 35 per cent each for infrastructure and natural resources, 25 per cent to properties and five per cent to inflation bonds. Across the vehicle spectrum, it contains 50 per cent equities, 40 per cent fixed income and 10 per cent commodities futures.

“Inside of the fixed-income area, it’s 90 per cent investment grade, 62 per cent North America, 60 per cent U.S., two per cent Canada. And most of the rest is coming from Europe,” said Gunzberg.

“On the commodities, side it’s split fairly evenly,” at a third each for agriculture, energy and metals.

Bearing those weightings in mind, Gunzberg also stressed the need to understand what real assets in any portfolio are aiming to achieve. The drive to alternative asset classes is due to a mixture of reasons, including the search for income, worry about a stock slump and inflation protection, she noted.

“You have to think about, ‘Why am I looking at this?’” she said, suggesting that going back and playing out various portfolio scenarios during historical market events could help demonstrate what the real assets might accomplish.

“When infrastructure doesn’t drop as much as the stock market after an event like Brexit or something, then how much does that preserve my capital?” she added. “I need cash for a liability. Will investing in infrastructure give me that cash? Or will it be more illiquid? You have to ask yourself those questions, and I think that’s how you measure risk. It’s really beyond a volatility number, an expected return number and a correlation number.”

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