True diversification entails allocating capital to investment strategies that exhibit a low or negligible correlation to traditional asset classes. By minimizing exposure to systematic equity/credit beta and integrating alternative sources of return potential, including real assets, investors can construct more efficient portfolios designed to optimize risk-adjusted returns. These portfolios have offered attractive long-term returns over 10 years, as seen in Exhibit 1 below. They also often demonstrate superior downside management and resilience during periods of heightened market stress or equity market drawdowns, as evidenced in Exhibit 2.
A strategically diversified portfolio should incorporate assets that not only provide defensive characteristics in market downturns but also align with secular growth trends. Real Assets share these characteristics and can play a key role in enhancing diversification and preserving capital during dislocations. However, despite their lower correlation to traditional markets, as seen in Exhibit 3 below, these strategies are not devoid of risk. A rigorous risk management framework, including oversight of market exposure, manager selection and liquidity risk is critical. It is important to explore a range of different risk/return drivers so that no single component dominates the performance of a portfolio. Different real assets respond to different stages of the economic cycle. Currently, we are experiencing an unprecedented part of the cycle. With tariffs exerting a growing influence on the current economic landscape, we believe investors should reevaluate real assets through a strategic lens. Understanding the key risk and return drivers of the asset class is particularly important considering the evolving trade dynamics.
Tariffs have historically had a mixed impact across asset classes. Historically, many real assets, including infrastructure have been less impacted by tariffs than other traditional asset classes. Broad secular trends continue to support demand for real assets, reinforcing their potential for sustained performance regardless of trade dynamics. A key advantage of infrastructure assets lies in their stable and predictable revenue streams, often underpinned by long-term leases or contracts, which contribute to consistent dividend yields. These income characteristics are especially appealing during periods of heightened market volatility or economic uncertainty.
That said, the impact of tariffs may not be uniform across all real asset subsectors. For example, the hospitality real estate sector may face headwinds if consumer spending softens due to an economic slowdown. Real estate development may be hindered by elevated material costs, particularly for imported items like steel, aluminum and lumber. Strategies focused on new development may face more pressure due to elevated material costs, particularly for imported items like steel, aluminum, and lumber. However existing assets could remain attractive given existing supply/demand dynamics. These variations highlight the importance of active management and sector-specific insight in navigating tariff-related risks.
We maintain a positive outlook for defensive, essential service assets such as infrastructure, particularly in the face of potential economic softening in 2025. These assets offer resilience and stability compared to more economically sensitive asset classes. The inherent inflation pass-through mechanisms within infrastructure investments are valuable, especially in an environment characterized by heightened interest rate and inflation volatility. WTW sees value beyond traditional sectors like utilities and conventional energy; examples include data centers, and telecom infrastructure.
Similarly, private real estate presents a compelling opportunity, having undergone a meaningful repricing of approximately 25%, positioning it attractively relative to other asset classes. Historically, the asset class has demonstrated strong performance following such repricing phases, as seen in Exhibit 4 below. WTW believes in targeting the less economically sensitive real estate sectors with dedicated specialists. Examples include healthcare, rental housing and data centers, which are experiencing robust secular growth driven by our aging population. For example, in senior housing, the convergence of increasing supply pressures and a growing wave of demand is anticipated to further exacerbate a significant supply / demand imbalance in the coming years.
For over two decades, WTW has provided strategic discretionary and advisory services in real assets, guiding clients in constructing resilient, diversified portfolios. We maintain that true diversification is a critical driver of superior risk-adjusted returns. An effective real assets strategy draws from a broad and diverse opportunity set, supported by a disciplined and systematic framework to evaluate and manage investment selection risk. Connect with us to explore how our expertise can support the achievement of your portfolio objectives.
Towers Watson Australia Pty Ltd ABN 45 002 415 349 AFSL 229921 (“WTW”) has prepared this material for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by WTW to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken based on its contents without seeking specific advice.
This material is based on information available to WTW at the date of this material and takes no account of developments after that date. In preparing this material we have relied upon data supplied to us or our affiliates by third parties. Whilst reasonable care has been taken to gauge the reliability of this data, we provide no guarantee as to the accuracy or completeness of this data and WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any errors, omissions or misrepresentations by any third party in respect of such data.
This material may not be reproduced or distributed to any other party, whether in whole or in part, without WTW’s prior written permission, except as may be required by law. In the absence of our express written agreement to the contrary, WTW and its affiliates and their respective directors, officers and employees accept no responsibility and will not be liable for any consequences howsoever arising from any use of or reliance on this material or any of its contents.
WTW may enter into transactions with, and use the services of, any of our related bodies corporate. Such arrangements will be based on arm's length commercial terms.
