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Real Asset funds: Effective or Expensive? - 1

Over the past year several mutual fund companies have introduced Real Asset funds and made a timely effort to cater to investorsincreased appetite for an exhaustive solution to address inflationary fears.

The investment objective for nearly all funds in this category is linked to the CPI-U and they allocate to inflation sensitive asset classes such as Natural ResourcesEquities, Commodities, TIPS and REITS. Some of the funds are listed below:

Principal Diversified Real Asset:

The fund allocates to 5 most liquid real asset categories which consist of Natural Resources' Equities, Commodities Futures, TIPS, REITs and MLPs. Each of the 5 portfolios is actively managed by the subadvisors listed in the previous table. The respective allocations to the asset categories were determined on the basis of optimization analysis conducted at Principal funds and rebalanced in accordance with the stated tolerance bands

Hartford Global Real Asset:

This fund is managed by Wellington Management Company and team at Wellington and allocates to the same major asset categories as PRDAX. However, the team doesn't invest in MLP(s) and instead takes a more global approach to include international inflation linked bonds & equities in the fund's portfolio. The portfolio managers can also overweight & underweight the asset categories on the basis of their economic outlook which is another distinct feature of the fund when compared to PRDAX.

PIMCO All Asset All Authority fund

This fund is quite different from most of its peers due to its somewhat unconventional yet very effective approach. PRDAX is a fund of funds and managed by Rob Arnott of Reasearch Affiliates. The portfolio allocates across a spectrum of traditional and alternative investment strategies and the manager can take a short position of upto 20% in US equities

Comparison

 
Principal Diversified Real Asset fund
Hartford Global Real Asset fund
PIMCO All Asset All Authority
Ticker
PRDAX
HRLAX
PAUAX
Approx. Expense Ratio
1.25%
1.05%
1.5%
Front Load
3.75%
5.5%
5.5%
Asset classes in universe
5
5
15
Asset Allocation
Static
Tactical overlay
Tactical Overlay
Sub-advisor(s)
Jennison Associates
Credit Suisse
Blackrock
Principal Real Estate Investors
Tortoise Capital Advisors
Wellington Management
Pacific Investment Management Co.
Click to enlarge

Expected Performance 

PRDAX and HRLAX can be classified as conventional real asset funds since they strategically allocate to the designated asset categories and dont take any short positions. The investment process for these funds is easier to understand and they are ideal for the long term investor. However the diversification benefits of including these funds are lower due to their higher allocation to Natural Resources Equities and REITS since both these asset classes are highly correlated to global equities. For conventional real asset funds the correlation to the MSCI World Index can be as high as 0.9 and they will most likely suffer in times of market stress
 
On the contrary PAUAX takes a more unorthodox approach to achieve the same objective and is much less correlated to the global equity market. The diversification benefits of this strategy were evident during 2008 when the fund returned -7.5% versus -40.7% for the MSCI World benchmark. The returns for this fund depend almost entirely on the portfolio manager's ability to opportunistically allocate to the different investment strategies and the investment skill of its underlying managers and hence this fund is not very suitable for an investor who is concerned about short - intermediate inflation
 
The Feasibility Question:

Are these Real Asset funds worth the money? Or is it more feasible for an investor to allocate to low cost ETFs which are now widely available in most major real asset categories?

In our  follow-up article we will share our insights on these questions and address issues such as strategic allocation and performance monitoring for these funds. 






 
 
 


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.