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Real Asset Funds as Diversifier

Do you think real asset funds such as JRI, NRIAX or RLY, act as a diversifier to an all equity/bond portfolio? I was curious if anyone uses these types of funds as a diversifier to their respective portfolios. Thanks.

Comments

  • edited January 2015
    I think that if you have a well diversified portfolio, then you already have these assets. Perhaps diversifier is the wrong term as it would be more of a bet that this sector will outperform the others.

    Also, and only my opinion, one can make plays on energy or gold or other specific areas, but when they are all combined into one entity called real assets, there might be too much dilution. Gold and energy may do well but they could be dragged down by other assets within that sector like timber for example.

    Real assets sounds like a new name for natural resources.

    Additional;
    If you think energy will be a big gainer in the future then invest in that sector for a minimal amount of your portfolio. Likewise for gold.
  • HI John - Recently, I did purchase some shares of XLE in my Roth IRA, thinking that energy will be higher in a year or two from now. I don't expect it to stay this low for the long term.

    However, I was looking at my overall portfolio and noticed that I have low stakes in real estate and utilities. Subsequently, I missed out on the run-ups of those sectors. Maybe I'm just performance chasing at this point with those sectors.
  • I think your bet on energy could be right. I do have a real estate fund, ARYVX that has done well. Right now it's about 4% of the portfolio. As for utilities, I don't follow them much but I have also noticed the same performance as you have. I think energy and utilities have some common ground here.

    As always, I'm not an expert.
  • edited January 2015
    It's a hot potato question. I won't attempt to answer it directly. You pretty much answer the question yourself. Broadening out away from traditional stocks and bonds does diversify you more. But, you can get into some pretty heated discussions as to whether that's advisable. "Deworsification" comes to mind.

    A second issue: The concept "Real Assets" is open to widely differing interpretations by different managers. If a manager rode the real estate bull for the past several years, he's looking pretty good today. If he's been heavily into oil, not so good. It's a broad area which might include timber, infrastructure (railways, ports, power generation), farmland, miners or gold bullion. So, you really need to look under the hood and see what you'd be diversifying into.

    A third thought here: With investments in raw materials (typical of these funds) you get more "cyclicality." These investments tend to outperform during strong economic times as the need for raw materials rises, and than underperform during a slowing economy. That's neither good nor bad - as long as it's understood.

    I'm not familiar with the funds you list. But, I known there are a great many out there and that there are profound differences among them.

  • hank said:

    The concept "Real Assets" is open to widely differing interpretations by different managers. If a manager rode the real estate bull for the past several years, he's looking pretty good today. If he's been heavily into oil, not so good. It's a broad area which might include timber, infrastructure (railways, ports, power generation), farmland, miners or gold bullion. So, you really need to look under the hood and see what you'd be diversifying into.

    ...

    I'm not familiar with the funds you list. But, I known there are a great many out there and that there are profound differences among them.

    @willmatt72 I think @hank 's advice here is exactly right. Because "real asset" can mean such a broad swath of things, you need to look under the hood. There are lots of differing funds, each sort of specializing in different areas. NRIAX, for instance, looks a lot different than PRAFX, which is different than FSRRX. They can all certainly act as diversifiers, but you have to know specifically what you want out of them.

    NRIAX / JRI 's focus is creating income in areas which could also show capital appreciation and might fight inflation. As such it looks for passthrough income from real assets, specifically from Real Estate and Infrastructure, and in both equities, preferreds, and fixed income. In other words, it has very limited commodity or natural resource exposure. That's also a big part of the reason why it has looked so good recently. Here's a link to NRIAX's info page at Nuveen. They have some good literature on the fund there. In particular, this is what the prospectus says about NRIAX's holdings:
    Principal Investment Strategies

    Under normal market conditions, the Fund invests at least 80% of the sum of its net assets and the amount of any borrowings for investment purposes in securities issued by real asset related companies that are generating income at the time of purchase. Real asset related companies are defined as: (i) companies that are in the energy, telecommunications, utilities or materials sectors; (ii) companies in the real estate or transportation industry groups; (iii) companies, if not in one of these sectors or industries, that (a) derive at least 50% of their revenues or profits from the ownership, management, operation, development, construction, renovation, financing, or sale of real assets, or (b) have at least 50% of the fair market value of their assets invested in real assets; or (iv) pooled investment vehicles that primarily invest in the foregoing companies or that are otherwise designed primarily to provide investment exposure to real assets.

    The categories of real assets on which the Fund will focus its investments are infrastructure and real estate. Infrastructure consists of the physical structures and networks upon which the operation, growth and development of a community depends, which include water, sewer, and energy utilities; transportation and communication networks; health care facilities, government accommodations, and other public service facilities; and shipping, timber, steel, alternative energy, and other resources and services necessary for the construction and maintenance of these physical structures and networks.
    Depending on the size of your portfolio, your risk tolerance, individual goals, and your comfort level with managing such things, you could just take a global infrastructure fund (GII, GLFOX, TOLSX) and combine it with a REIT index/fund or REIT income fund (FRIOX, LRIOX), and maybe some sort of TIPS or commodity exposure to come up with your own allocation. If the portfolio is smaller, or you want professional management, than something like NRIAX or PRAFX make sense to my mind. In anycase, it makes more sense as an "alternative" to me than liquid alternatives/managed futures/non-traded assets or what have you.
  • be careful if you've never ventured in closed end funds before. i've owned JRI since it lost its IPO premium and the price spent years in 16s before it moved up recently. closed end funds have a asset class volatility related to premium/discount movement in addition to the volatility of the underlying leveraged portfolio. so that particular vehicle might not work as intended. unless you have experience with closed-end funds, the open end unleveraged alternative might be better.

    separately, i recall you were looking for more tax efficient vehicles, and JRI is the opposite of that.
  • fundalarm said:

    be careful if you've never ventured in closed end funds before. i've owned JRI since it lost its IPO premium and the price spent years in 16s before it moved up recently. closed end funds have a asset class volatility related to premium/discount movement in addition to the volatility of the underlying leveraged portfolio. so that particular vehicle might not work as intended. unless you have experience with closed-end funds, the open end unleveraged alternative might be better.

    separately, i recall you were looking for more tax efficient vehicles, and JRI is the opposite of that.

    Yes, you are correct. This type of fund (JRI, NRIAX, etc) would be used in a tax-deferred account. They all look pretty tax inefficient to me.
  • Howdy,

    Hank was spot on, as were the others. Real assets can be in the form of equities (i.e. natural resource funds), or the actual commodities themselves, also available in funds and ETFs. The former consists of stocks of companies involved in the commodity, the latter are options and futures and actual stockpiles of the commodity itself. These instruments are traded in different markets very often dancing to different drummers.

    Do they track each other? Sure, if the commodity is doing well, the companies involved with it will also do well, and vice versa. However, as an investor, you also need to understand that for various and sundry reasons, they can diverge considerably, particularly in the short run.

    Hand also mentioned the cyclicality [love that word, Hank] of the commodity markets. This is a pretty well established historical pattern. They run 12-15 years or so. This is due to their nature - you have to explore, discover, gather, process, deliver . . . oh, and have all your permits. It takes enormous time to bring new resources online and that results in the cyclicality.

    When you talk about diversification, in this case it's your portfolio you're considering. Why not consider the diversification of your wealth. About ten years back, I read a quote from the elder Baron Rothschild saying that to protect yourself financially, one should 1/3 of their wealth in securities, 1/3 in real estate, and 1/3 in rare art [define rare art as you wish, but it ain't Beanie Babies.]

    When I first read this, I ran my numbers and almost blew chunks. I was 90/8/2. I've worked pretty hard to get it to around 60/30/10 and am still working at it.

    Just some ramblings,

    and so it goes,

    peace,

    rono
  • Good to see some knowledgeable posters chime in.
  • Great input. Thank you all. I certainly have some things to ponder and work out on my own. I never realized that the term "real assets" can encompass so many different sectors and interpretations by investors. But it makes sense based on the holdings of some of the funds cited in this thread; they vary widely.
  • edited January 2015
    Hi Wilmatt72

    Thanks for the question. I learned a lot too, especially from Rono's explaination of why these things run in cycles. Best I've heard.

    One additional observation: You'll find some of these funds with significant holdings in trailor parks and self-storage facilities. Reason? Current income and, more importantly, appreciation of the underlying land.

    Regards
  • Howdy,

    "Underlying land" is a huge issue in the real estate arena, going back to Ray Kroc. The story goes that he had given a lecture to some MBA students and they invited him out for a beer. Over suds they asked about the restaurant business to which he replied, "I'm not in the restaurant business, I'm in the real estate business".

    Think of where some chain stores are located - McDonalds and Sears are particularly heavy into this but I'm sure there are others.

    and so it goes,

    peace,

    rono
  • edited January 2015
    As a follow-up, I recently purchased TOLLX (load waived at Fidelity) as a way to gain exposure to global infrastructure securities. I may supplement it with a REIT/Real Estate Income fund at some point. Thank you for the input.
  • As a follow-up, I recently purchased TOLLX (load waived at Fidelity) as a way to gain exposure to global infrastructure securities. I may supplement it with a REIT/Real Estate Income fund at some point. Thank you for the input.

    TOLLX is a very good choice.

    I continue to own Brookfield Infrastructure (BIP), which is an opportunistic vehicle that can invest in specific infrastructure projects (toll roads, rail, ports, etc.) They recently bought a stake in Vale's logistics (rail and port) business in Brazil, for example. I've owned BIP for a while now, the issue is the K-1 at tax time.

  • hank said:

    Hi Wilmatt72

    Thanks for the question. I learned a lot too, especially from Rono's explaination of why these things run in cycles. Best I've heard.

    One additional observation: You'll find some of these funds with significant holdings in trailor parks and self-storage facilities. Reason? Current income and, more importantly, appreciation of the underlying land.

    Regards

    ESL (Equity Lifestyle Properties) is a REIT that focuses on RV parks, resort/retirement communities and the like. It's not terribly exciting on the surface (although RVs have become big again, it seems.) However, it sits on a ton of waterfront/near water land.
  • Thanks for the info, Scott. I see that Fidelity and Vanguard both hold a lot of shares of ELS in their respective real estate funds.
  • edited January 2015

    Thanks for the info, Scott. I see that Fidelity and Vanguard both hold a lot of shares of ELS in their respective real estate funds.

    Probably in part due to Sam Zell as chairman. That said, ELS is an example for me of the importance of being interested in the underlying company. I liked it, but didn't really feel that it was a long-term holding (or that I guess it "made the list") and did well and sold it late last year because I felt it was overvalued. Had I held on, would have continued higher nicely.

    I suppose it speaks to the idea of you hold something for a long-term and sometimes it'll be overvalued, sometimes not, but you hope the long-term trend is higher. Trying to make judgment calls about overvaluation in the short-term - especially with monetary policy the way it is in the world - can certainly lead to disappointment.

    I continue to hold a number of other real estate holdings (or hybrid REITs, or in the case of BPY, a REIT-y MLP) - some of which I think are noticeably overvalued - for the long-term and simply reinvest.

    There's quite a few REITs that I would be interested in (Vornado, Boston Properties, Tanger Outlet), but not at these levels.

    That said, what will be the demand for REITs if the 10 year goes to 1%?
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