The Performance of Direct Investments in Real Assets: Natural Resources, Infrastructure and Commercial Real Estate

Abstract

This paper considers the performance of direct investments in three real asset classes: natural resources (namely timberland and farmland), energy infrastructure and commercial real estate. Using publicly available data for a period starting in 1978 (for real estate) or 1996 (for infrastructure) and ending in 2012, we document that investing in these real asset classes would have provided significant diversification benefits relative to a traditional portfolio consisting of only public equities and government bonds, without evidence of deteriorating overall performance. However, and with the exception of timberland investments, the real asset classes did not provide any inflation hedging benefits over our time period. Further, the diversification benefits of direct investments in natural resources are lower in times that equity markets go down. Significant challenges of investing in real assets include illiquidity, generally long holding periods, and information uncertainty.