A real asset is a physical or tangible asset such as real estate, infrastructure, or commodities, that holds intrinsic value and is used to diversify investment portfolios.
Real assets refer to physical or tangible assets that have intrinsic value due to their substance and properties. Common examples of real assets include real estate, infrastructure assets like bridges and energy facilities, commodities such as gold and oil, and natural resources. Unlike financial assets, which are intangible and represent contractual claims, real assets are valued for their utility and ability to provide an inflation hedge. In finance and wealth management, real assets play an essential role in portfolio construction as they provide diversification benefits and a potential hedge against inflation. Their value tends to be less correlated with traditional financial assets such as stocks and bonds, which can reduce overall portfolio volatility. Institutional investors, including family offices and wealth managers, often allocate a portion of capital to real assets to achieve long-term capital appreciation, income generation, and risk mitigation. Real assets often require specialized knowledge to manage effectively due to factors like illiquidity, valuation complexity, and operational responsibilities. Investment vehicles that provide access to real assets include direct ownership, real estate investment trusts (REITs), infrastructure funds, and commodity funds.
Incorporating real assets into an investment strategy can significantly impact diversification and risk management by introducing assets with low correlations to equities and fixed income. They often serve as a natural inflation hedge, preserving purchasing power during periods of rising prices. This characteristic is particularly valuable for longer-term investment horizons commonly associated with family office portfolios. From a reporting and tax planning standpoint, real asset investments typically involve different accounting treatments and tax implications compared to financial assets. For instance, real estate investments may offer depreciation benefits and unique capital gains considerations. Governance considerations include the need for enhanced due diligence, ongoing asset management, and sometimes direct involvement in operational decisions. Thus, understanding real assets is crucial for developing a holistic and resilient wealth management approach.
A family office invests $5 million directly in a commercial real estate property that generates yearly rental income. This investment diversifies the portfolio away from stocks and bonds and provides both cash flow and potential appreciation. Over five years, assuming a 6% annual yield and 3% annual appreciation of the property, the family office gains income and capital growth, partially insulating the portfolio from market volatility.
Real Asset vs Financial Asset
While real assets are tangible and have intrinsic value based on their physical properties, financial assets represent claims or contracts on real assets or future cash flows, such as stocks, bonds, and derivatives. Real assets tend to provide an inflation hedge and diversification benefits, whereas financial assets often focus on income and capital appreciation tied to market performance.
What types of assets are considered real assets?
Real assets include physical, tangible assets such as real estate, infrastructure, natural resources, agricultural land, and commodities like precious metals and energy products.
Are real assets typically liquid investments?
No, real assets are generally less liquid than financial assets. Direct ownership of real estate or infrastructure can require significant time and effort to buy or sell, although some real asset exposure can be gained through more liquid instruments like REITs.
How do real assets help protect against inflation?
Because real assets have intrinsic value and often generate income linked to tangible goods or services, their prices and cash flows tend to rise with inflation, helping preserve the real purchasing power of invested capital.
