Real assets proved useless as an inflation defence during the recent flare-up, a new study published by the CFA Institute has found.
According to the analysis of proxy indices during the 2021 to 2023 inflationary surge, real-asset benchmarks failed to provide any hedging qualities.
In fact, real assets “moved in the wrong direction, on average, in response to changes in inflation”, the CFA study says.
Furthermore, the data shows real-asset indices flopped as hedges against all measures of underlying inflation as well as headline price moves.
“By any of these definitions of trend inflation, real assets were even less of an underlying-inflation hedge than a headline-inflation hedge during the 2021 to 2023 inflation episode,” the paper says.
While the study concedes that dispersion of returns among individual managers was “undoubtedly high”, the aggregate result calls into question long-held assumptions about how real assets perform under inflationary duress.
The analysis carried out by Marc Fandetti, portfolio strategist at the Massachusetts-based Armstrong Advisory Group, also found all but one sub-genre of real assets underperformed inflation over the two-year period – but only just.
“Among the broader set of indexes considered, only commodities ‘beat’ inflation,” the study says.
Fandetti says as well as missing investor expectations that real assets should “at least” keep up with price increase, the data shows the asset class also fell under the “more lenient standard” of asset allocators that hedges only must be positively correlated with inflation.
“At least since the 2000s, real assets and inflation-protection strategies have been a fixture of sophisticated asset pools. After decades of dormancy, high inflation resurfaced in 2021. Institutional investors probably felt prepared. But they may have instead been disappointed,” he says.
“… To the degree that the indexes used in this article are representative of manager returns and future behavior of real assets during inflation surges, however, asset allocators can draw conclusions now. When inflation arrived, real assets failed.”