Pimco: Real assets in portfolios can boost resilience

Adding real assets to a typical stock and bond portfolio can help improve resilience, according to Pimco, as many expect inflation to remain above central bank targets.

Starting with a hypothetical 50/50 equity and bond portfolio, portfolio managers Greg Sharenow, Steve Rodosky and Lorenzo Pagani, then added a mix of real assets, comprising 10 per cent in Treasury inflation-protected securities (TIPS), 5 per cent in broad commodities and two per cent in gold.

They then measured the asset’s ability to hedge inflation or betas. The initial portfolio had an inflation beta of -2.1, while the new portfolio with real assets had an inflation beta of -1.3. This means the negative inflation sensitivity was significantly reduced with the real assets allocation.

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“Not surprisingly, during the recent inflation surge, the new hypothetical portfolio with real assets outperformed the initial 50/50 portfolio by 62 basis points, with less volatility, over the three-year period that ended 31 December 2023,” the portfolio managers noted.

“Less commonly known, however, is that the benefits of real assets do not require an inflation spike to occur. The inflation-hedged portfolio is generally advantageous even during more mild periods of inflation – when inflation runs at or above the Federal Reserve’s two per cent target, as we expect it to do this year.”

Pimco expects inflation to decline through the year, although it is unlikely to return to historically low levels below two per cent. There are several factors, including reshoring supply chains, ongoing trade frictions and geopolitical tensions, that will continue to impact inflation.

Therefore, across developed markets, the portfolio managers expect inflation to be around the two to three per cent range. With this backdrop, they view TIPS valuations as compelling and offering generous real yields.

“With TIPS near their most attractive valuations in 15 years and commodities still buoyed by geopolitical factors and supply constraints, investors could potentially benefit from an inclusion of real assets,” they noted.

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