By Jon Treitel, Senior Director, Portfolio Strategist
On 18 September, the U.S. Federal Reserve committed to its first rate cut since March 2020, after rates peaked in July 2023.
This heralds a potential catalyst for real assets and a new dawn for potential returns. At CBRE Investment Management (CBRE IM), we believe that holistic global real assets are poised to perform—not only in this market environment, but also across market cycles. In this article, we review:
Global real assets—such as public and private real estate and infrastructure—have shown durable returns over time. Real assets perform essential functions—housing, storage, transportation, power, and communications—that enable livelihoods and facilitate the movement of people, goods, energy, and data.
These companies and assets tend to serve consistent demand, often independent of pricing, and demonstrate predictable growth. With cash flows led by long-term contracts or regulation, they often provide inflation-protected income. Across real asset sectors, the ability to access varying degrees of economic sensitivity further improves the ability of active managers to enhance exposures during a given phase of an economic cycle.
Collectively, real assets represent a thriving multi-trillion dollar market and are well-represented by the sectors highlighted below.
Common investment characteristics:
Representative holdings:
Real Estate:
Infrastructure:
Information is the opinion of CBRE Investment Management, which is subject to change and is not intended to be a forecast of future events, a guarantee of future returns, or investment advice. Any factors noted are not indicative of future investment performance.
A blended approach between public and private real asset solutions can offer further potential benefits. We find blended management in real assets can balance liquidity, enhance sector exposures across real estate and infrastructure, and provide immediate access to the asset class. Lastly, the active management of blended public/private offerings allows the potential for dynamic management, with the ability to capitalise on relative mis-pricings when opportunities arise. This approach ultimately aims to optimise returns while managing risk, liquidity, and market opportunities more effectively.
We see an opportunity for global real assets in the current market. While global real assets have outperformed broad equities, bonds, and 60/40 equity/bond portfolios in the long-term, they have lagged since the beginning of the U.S. Fed hiking cycle. Yield sensitivity lowered listed performance over the past two years, while delayed appraisals slowed private returns.
The charts below show both the long-term indexed performance of global real assets compared to broad equities, and performance since the U.S. Fed first hiked rates in March 2022. In the short-term, global real assets have lagged.
Global real assets: An opportunity to invest in a track record of outperformance
Source: CBRE Investment Management. Q1 2004-Q1 2024. Global Equities represented by the MSCI World Index. Global Real Assets represented by a blend of 30% of the FTSE Global Core Infrastructure 50/50 Index, 40% of the FTSE EPRA NAREIT Developed Index, 15% of the Global Real Estate Index, and 15% of the Cambridge Associates Direct Infrastructure Index. Indexed returns based on USD returns.
CBRE IM believes the current market environment—one of falling interest rates and moderately higher long-term inflation—is positive for real asset performance.
The charts below highlight how global real assets perform compared to a traditional 60% equity / 40% fixed income portfolio depending on interest rate or inflationary conditions.
Key Takeaways
Global real assets have outperformed during periods of falling rates and sustained inflation
Source: CBRE Investment Management. Q1 2004-Q1 2024. Equities represented by the MSCI World Index. Fixed income by the Bloomberg Global Aggregate Index. Global Real Assets represented by a blend of 30% of the FTSE Global Core Infrastructure 50/50 Index, 40% of the FTSE EPRA NAREIT Developed Index, 15% of the Global Real Estate Index, and 15% of the Cambridge Associates Direct Infrastructure Index. Average annualised performance based on USD returns. Periods of above-average and falling interest rates considers periods where the U.S. 10-Year yield has been above a trailing three year-average and is falling. Periods of sustained inflation consider periods during which CPI has been above the historic average.
Overall, the data points to the strategic advantage of including global real assets in an investment portfolio to enhance returns and provide inflation protection.
The Australian market represents a small portfolio of broad equities, with sector concentrations in financials, materials, and energy. Global real assets enhance the opportunity for diversification amongst domestic investors. Tactically, they also better position investors to benefit from global central bank interest rate cuts.
Across the U.S., Canada, and Europe, central bankers either have, or are now, embarking on a reduction in borrowing rates. Global exposures such as those in the CBRE Global Real Assets Fund are poised to benefit from these actions. Over 87% of the CBRE Global Real Assets Fund is exposed to areas where interest rate cuts are now in force.
CBRE Global Real Assets Fund Exposures
Portfolio as at 30 June 2024. Allocation figures indicated are subject to change and should not be considered as investment recommendations.
Whether in the support of AI and data demand through data centres and power generation, in the strengthening of power grids and the development of renewables, or in the development of commercial real estate to support economic growth, we expect global investment to support real assets.
In the U.S., billions of dollars in investment from large tech firms has driven a paradigm shift in the demand for U.S. data centre capacity. The resulting development pipeline has led to a quadrupling of long-term estimated growth for U.S. electric power demand. In Europe, the demand for sustainable real estate continues to drive rental premiums, while housing affordability and the associated demand for rental units remains an issue across developed markets.
This need for real asset capacity and investment is driving earnings growth. In listed real assets alone, we see a growth rate above the historical average. Growth can strengthen in coming years, as secular investment builds and current projects are turned into service. When coupled with strong up-front income and the potential for real asset values to benefit from lower interest rates, CBRE IM is optimistic on the potential for future strong returns.
Global real asset earnings are growing above the long-term average
Source: CBRE Investment Management, FTSE EPRA NAREIT Developed Index, FTSE Global Core Infrastructure 50/50 Index as of 06/30/2024. “f” refers to “forecasts”. Estimates are derived with CBRE Investment Management and/or FactSet estimates for individual company estimates as of 06/30/2024. EPS estimates can be affected by assumptions concerning revenue growth, operating margins, interest rates, and tax rate assumptions. Information is the opinion of CBRE Investment Management, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results.
Investors allocate to real assets for several reasons: strong and growing income, compelling capital appreciation, downside protection, and portfolio diversification potentials. With low correlation relative to traditional assets and improved risk and returns, investors find the potential to strengthen core portfolio holdings with global real assets.
The example below shows the impact of blending real assets into a traditional portfolio. In Portfolio C, the combination of real assets with equities and fixed income improves risk-adjusted returns while also further enhancing returns above inflation plus a hurdle rate.
Global real assets improve risk-adjusted returns and “inflation plus” performance
Source: CBRE Investment Management. Q1 2004-Q1 2024. Equities represented by the MSCI World Index. Fixed income by the Bloomberg Global Aggregate Index. Global Real Assets represented by a blend of 30% of the FTSE Global Core Infrastructure 50/50 Index, 40% of the FTSE EPRA NAREIT Developed Index, 15% of the Global Real Estate Index, and 15% of the Cambridge Associates Direct Infrastructure Index. Returns in AUD. An index is unmanaged and not available for direct investment Information is the opinion of CBRE Investment Management, which is subject to change and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Forecasts and any factors discussed are not a guarantee of future results.
Global real assets hold a prized place within investor portfolios, not only for their benefits over the long-term, but also for their performance as cycles wax and wane. When economies expand and moderate, global real assets can outperform a traditional equity/bond portfolio; they continue this trend during recession; they provide upside capture during a recovery. This is shown visually below, alongside the annualised returns of global real assets during these periods:
Global real assets perform well compared to traditional portfolios across an economic cycle
Source: CBRE Investment Management, FTSE EPRA NAREIT Developed Index, UBS Global Infrastructure & Utilities linked to FTSE Global Core Infrastructure 50/50 Index, MSCI World Index as of 06/30/2024. Conference Board Leading Economic Index (LEI). An index is unmanaged and not available for direct investment Information is the opinion of CBRE Investment Management, which is subject to change and is not intended to be a guarantee of future results or investment advice. Forecasts are not indicative of future investment performance.
Economic phases are determined using the US Economic Cycle Indicator as calculated using the year-on-year change in the Conference Board’s Leading Economic Index (LEI), normalising its history using a z-score, and tracking the 3-month moving average of that z-score. The Economic Cycle is determined by both the level and the change in the indicator, requiring two months in the same cycle in order to confirm a new cycle.
CBRE IM sees the potential for a new dawn in global real asset returns. Against the backdrop of a global fall in interest rates after an unprecedented hiking cycle, global real asset valuations are poised to rise. Earnings and cash flows are growing, aided by secular forces, while the backbone of inflation protection, risk-adjusted returns, and the potential for “all-weather” performance strengthen the case for the asset class. As we look ahead, we see global real assets as a compelling, and complete, solution for today’s markets.
The CBRE Global Real Assets Fund broadens access to global real asset markets by offering a lower minimum investment compared to direct ownership. It provides investors with exposure to an institutional-grade portfolio of real assets, delivering the benefits of active management, diversification and liquidity without the need for a significant upfront capital commitment.
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