Role in portfolio: LACERA expects assets in this category to provide income as well as a hedge against inflation, while diversifying the fund due to the assumed low correlation of returns between these assets and other asset classes.
- Core and Value-Added Real Estate
- Natural Resources/Commodities
- Treasury Inflation Protected Securities (TIPS)
Real assets generally include physical assets, such as real estate and infrastructure, or securities whose value is derived from a physical asset, such as commodities or natural resources. Assets in this category may be invested in both public and private investments and may be liquid or illiquid, as well as passively or actively managed.
Real assets and inflation hedges are sensitive to inflation. The primary risk for owners of real assets/inflation hedges is that they fail to provide a hedge against long-term changes in inflation. A secondary risk is loss of principal. The value of real estate and natural resources assets may fall, particularly during an economic downturn, but also due to idiosyncratic aspects of each asset. Diversification may offset asset-specific risk. Foreign assets are also subject to currency movements against the U.S. dollar. TIPS are exposed to liquidity risk, as they tend to be less liquid than nominal U.S. Treasuries, particularly during a market environment in which there is a flight to safety.