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Exploring the Road to Inflation Protection When Energy Fails Learn how the key benefits of real assets extend to different markets around the world.
BY Jodie Gunzberg

INTRODUCTION


In our recent paper, Let’s Get Real About Indexing Real Assets, global real assets are defined for the first time in an index. The index includes a complete set of liquid real assets (infrastructure, property, natural resources, and inflation bonds) that have been blended using equities, fixed income, and futures. The results demonstrate that the S&P Real Assets Index may provide inflation protection and improve diversification when added to a mix of U.S. stocks and bonds.


The following analysis shows how real assets may provide inflation protection and affect portfolio diversification in different markets around the world, including Australia, Brazil, Canada, China, the Eurozone, Japan, Mexico and South Korea. The results are similar to those from the U.S. where natural resources and inflation bonds may provide the most inflation protection, though the excess returns of these individual assets may not be a satisfactory basis to improve risk-adjusted returns when added to a portfolio mix of traditional assets. Therefore, the combined real assets are an important aspect of trying to achieve a desired level of inflation protection and diversification.


INFLATION PROTECTION


Data and Methodology


The study period is from April 2006 to December 2015, based on the earliest available data for indices that are used as proxies for asset class returns. Monthly year-over-year percent changes in the Consumer Price Index (CPI) levels represent changes in inflation. Exhibit 1 shows the constituent indices inside the S&P Real Assets Index used in the analysis. The index is composed of 50% equities, 40% fixed income, and 10% commodity futures, allowing the full (public) capital structure of real asset companies to be represented.

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