In his book Pioneering Portfolio Management, the former CIO of the Yale endowment, David Swensen, helped popularise the idea that long-term portfolios should extend beyond traditional stocks and bonds to include assets linked to the real economy and alternative assets such as hedge funds. First published in 2000, the book drew on lessons from investing across a range of market environments, including periods of elevated inflation. One of its enduring messages is that portfolios can be made more resilient by broadening their sources of return. Swensen argued that one way to do this is via real assets, which can help diversify traditional bond-equity exposures and offer some protection for purchasing power when inflation is higher.
SO, WHAT ARE REAL ASSETS?
ASSET TYPES
To put this in context: in 2022/23 a client could realise up to £12,300 in gains each year with no tax to pay and, crucially, no obligation to report those gains to HMRC. Today, that tax-free threshold is just £3,000. Any gains above this level will attract CGT at the following rates:
WHY ARE THEY BACK IN FOCUS?
Because the market backdrop has changed. For much of the past two decades, investors operated in a world of subdued inflation, deepening globalisation and broadly supportive correlations between major asset classes. That regime now looks less secure. Inflation pressures have proved stickier than many expected, while geopolitical fragmentation is reshaping trade, energy flows, and supply chains.
Recent years have also been a reminder that supply can no longer be taken for granted. Since 2020, the global economy has absorbed a series of major disruptions – from the pandemic and its aftermath to energy shocks and renewed regional conflict, including Ukraine and Iran. The latest tensions involving Iran and the wider Middle East are another example of how quickly stress in strategic regions can ripple through commodity markets, transport routes, and inflation expectations.
At the same time, the relationship between bonds and equities has become less reliably supportive. When inflation is low and stable, bonds can often help offset weakness in equities. But when inflation risk re-emerges, that relationship can become less dependable. In addition, rising pressure on government deficits may make sovereign bonds less reliable as portfolio shock absorbers. In that environment, assets linked more directly to physical infrastructure, pricing power, contracted revenues, or scarce resources can attract renewed attention.
Another important driver is electrification. The shift towards more electric, digital, and energy-intensive economies requires enormous investment in grids, storage, transmission, renewables, transport networks, and raw materials. This is not a short-term story, but rather a structural theme likely to unfold over many years and one that touches multiple parts of the real asset universe.
REAL ASSETS WITHIN PORTFOLIOS
Within the Core LGT portfolios (our investment partner), there is direct exposure to real assets via various funds such as the Cohen & Steers Diversified Real Assets fund and indirectly through holdings such as L&G UK 100, Ruffer Diversified Return and CG Absolute Return. The Cohen & Steers fund, which invests into Real Estate, Infrastructure, Natural Resources and Commodities / Precious metals, has shown its merit as a diversifier to bonds and equities, up circa 13% YTD through a challenging period for markets and in particularly bonds with the gilt index down -2.36%. In 2022, during the last inflationary spike, it also proved resilient. The two charts below support this point.
FUNDS & ASSETS – 2022
LOOKING FORWARD
The tectonic plates are shifting at both a geopolitical level – from tariffs and NATO to currency realignment – and a technological level, namely through the rise of AI. The pace of change is unusually high. Yet when trying to make sense of major transitions, it often helps to look backwards as well as forwards. In that respect, Swensen’s views on alternatives and real assets look as relevant today as they did in 1999.
For both advisers and clients, the key point is straightforward; real assets can help solve for the uncertainty surrounding inflation, infrastructure, energy security, supply constraints, and geopolitical change. They provide exposure to parts of the economy that are likely to remain central to the next decade. That does not mean they are immune from volatility. But it does help explain why they have returned to the conversation at a time when old assumptions around growth, inflation and diversification are being tested.
Please contact NBL if you need to speak to us.
