In today's fast-paced financial landscape, investors are constantly seeking ways to outperform traditional markets. Real assets provide a compelling solution by offering tangible, physical holdings that generate value beyond paper claims.

These assets include infrastructure and natural resources, which are valued for their intrinsic qualities rather than speculative cash flows. This article explores how real assets can help you achieve alpha and consistently beat the market.

The journey begins with understanding that real assets are not just alternatives but powerful tools for enhancing portfolio resilience in uncertain economic times.

What Is Alpha and Why It Matters

Alpha, often symbolized as α, represents the excess return an investment earns above a risk-adjusted benchmark like the S&P 500. It is a key measure of manager skill and strategic outperformance in finance.

For real assets, alpha stems from the unique ability to leverage physical properties for superior gains. The formula for calculating alpha is α = Portfolio Return – (Market Return × Portfolio Beta).

This calculation helps investors quantify how well their investments perform relative to the market. For instance, if a real asset fund returns 18% while the market returns 10%, with a beta of 1, the alpha is 8%.

Jensen's Alpha, a refined version, compares portfolio return to the Capital Asset Pricing Model (CAPM) expected return. This risk-adjusted perspective is crucial for accurate performance assessment.

In private real assets, measuring alpha can be challenging due to illiquidity and non-standard benchmarks. However, this complexity often creates opportunities for greater alpha potential during market sell-offs.

Real assets contribute to alpha through direct ownership, value creation, and strategic exits, similar to private equity approaches.

The Core Benefits of Real Assets

Real assets offer several advantages that drive alpha and help investors beat the market consistently. These benefits are rooted in their physical nature and economic role.

• Inflation protection: Tangible assets like infrastructure and farmland maintain value during inflationary spikes, often outperforming stocks.
• Market downturn protection: With lower volatility, real assets provide stability and yields when equities decline.
• Diversification benefits: They complement stocks and bonds, reducing overall portfolio risk and enhancing resilience.
• Stable income generation: Assets such as core infrastructure offer reliable revenue streams with attractive yields.
• Capital appreciation potential: Manager skill and value creation can lead to significant growth in asset value over time.

To summarize these benefits, here is a table that outlines key mechanisms and impacts:

These benefits collectively enable investors to achieve consistent market outperformance through strategic real asset allocations.

Exploring Real Assets Strategies

Investors can choose from various real assets strategies based on their risk tolerance and return objectives. Each strategy offers different ways to capture alpha and beat the market.

• Core and Core Plus strategies: These focus on low-risk assets like core infrastructure and farmland, providing stable income and inflation protection.
• Value Add and Opportunistic strategies: Higher-risk approaches that target non-core infrastructure or energy services for significant alpha through active management.
• Natural Resources strategies: Medium to high-risk investments linked to economic growth, such as commodities or energy transition sectors.

The choice between private and public exposure is also critical for maximizing returns. Private real assets often offer lower volatility and purer exposure to tangible holdings.

• Private vehicles include commingled funds, direct investments, and co-investments, which are illiquid but have higher alpha potential.
• Public options like ETFs or sector funds provide liquidity but may be more correlated with market movements, reducing pure alpha opportunities.

Diversifying across strategies and vehicles helps in balancing risk and return effectively for long-term success.

Historical Performance Evidence

The historical track record of real assets supports their role in generating alpha and beating the market. Over the years, these assets have demonstrated resilience and growth.

Key performance indicators include growing assets under management (AUM) for private real assets, reflecting increasing investor confidence. For example, AUM has risen steadily since 2000, with natural resources dominating early investments.

• 10-year interquartile spreads for private infrastructure and natural resources are wider than for public equities, indicating greater alpha via manager selection.
• During high-inflation periods, real assets have consistently outperformed traditional stocks, providing reliable hedges.
• The energy transition is creating new investable sectors, such as renewables and carbon sequestration, which offer fresh alpha opportunities.

This evidence underscores the enduring value of tangible holdings in diverse economic conditions, making them a smart choice for beating the market.

Addressing Risks and Building Portfolios

While real assets offer compelling benefits, they come with risks that must be managed for optimal performance. Understanding these risks is key to successful investing.

• Illiquidity in private markets: Investments can lock up capital for extended periods, requiring careful planning.
• Economic sensitivity: Performance may vary with sector-specific factors or broader economic cycles.
• Measurement pitfalls: Issues like beta misattribution or omitted liquidity premia can skew performance assessments.

To mitigate these risks, follow practical portfolio construction guidance. Start by defining the role of real assets in your portfolio, whether for inflation protection or growth.

• Diversify across vintage years, geographies, and strategies to spread risk and enhance resilience.
• Use a mix of vehicles, such as commingled funds for privates and ETFs for publics, to balance accessibility and performance.
• Regularly revise allocations to adapt to market dynamics, like the ongoing energy transition, ensuring long-term alpha generation.

By thoughtfully integrating real assets, investors can build portfolios that not only withstand volatility but also consistently beat the market.

Conclusion: Embracing Tangible Value for Future Success

Real assets represent a powerful avenue for investors seeking to achieve alpha and outperform traditional markets. Their tangible nature provides unique advantages that financial assets often lack.

From inflation-beating returns to stable income streams, real assets offer a path to sustained market outperformance. The key lies in leveraging manager skill and strategic selection to unlock alpha.

As global trends like the energy transition evolve, real assets will continue to present new opportunities for growth. By embracing these holdings, you can secure a financial future built on tangible value and resilience.

Start exploring real assets today to transform your portfolio and beat the market with confidence and insight.