In this Viewpoint, we examine the definition of “real assets” and explain how intellectual property exhibits characteristics consistent with other real assets.
The understanding of “real” assets has evolved over time with the expansion of asset-based investment strategies available to institutional investors. However, there is no one accepted definition of real assets. Past thinking on the subject has been limited by the attempt to reduce real assets to a single characteristic, such as the positive correlation to inflation or physical tangibility. Academic research has also contributed to the conception and evolution of thought into what constitutes a real asset.
And while a standard definition may remain elusive within the investment community and academia, there is an identifiable set of overlapping characteristics that tend to persist across definitions of real assets, including:
- Positively correlated with U.S. or European price inflation
- Likely to preserve value during periods of macroeconomic instability
- Should benefit directly from increasing scarcity of production inputs
- Are often essential to economic infrastructure
- May offer risk-and-return properties that match long-term liabilities
We consider these insights to be valuable contributions to the understanding of real assets. They also help us to understand the properties of those real asset investment strategies that sophisticated investors have used in conjunction with other investment strategies in order to fund long-term liabilities.
We believe that a multi-dimensional understanding of real assets that incorporates all of these characteristics makes particular sense for investors seeking to manage or mitigate inflation risk (as well as other investment risks), as it addresses the fundamental weakness of investment strategies that narrowly focus on specific asset classes. Inflation can have many causes—cost push, demand pull, external trade imbalances, macroeconomic instability, etc.—against which no single specific asset class is likely to provide an effective hedge. Gold may provide a good hedge against inflation caused by external trade imbalances, for instance, but it is not clear the precious metal will provide a good hedge against, say, wage-driven cost push inflation.