Cohen & Steers: DC Plans Need Real Assets

May 15, 2012 ( - Cohen & Steers released a white paper that discusses the merits of including real assets—commodities, real estate and natural resources—in a DC portfolio. 
According to the paper, this type of allocation can protect the long-term power of DC plans by improving the chances of meeting correlation and diversification goals.

The paper states that for DC plan sponsors, there is a fine line between an offering menu with enough asset-class diversification and one with an overload of choices. The authors say diversification can be an effective tool to help maintain the long-term purchasing power of retiree assets; however, too many choices can lead to confusion and poor decisions on the part of the participant. The white paper looks to bridge this gap with a turnkey solution to real-assets diversification.

Cohen & Steers began their research with a study on the characteristics and drivers of true price inflation. Its most common measure is the Consumer Price Index (CPI), reported monthly by the Bureau of Labor Statistics. But what if CPI inflation understates true economic inflation? If this is true, then strategies pegged to this benchmark could disappoint when inflation moves higher.

The paper’s authors write that today’s environment is marked by low interest rates and accommodative global monetary policy, which serve to diminish the threat of near-term inflation. But ultimately, this same quantitative easing could be the catalyst that drives inflation higher, as it swells the balance sheets of the world’s developed economies.

Through this perspective, Cohen & Steers sees some investment implications in the design of a real-assets strategy. One is the importance of maintaining broad asset allocation, because it is difficult to forecast how and when these macro conditions will influence inflationary trends. It also turned their focus to real-asset classes, whose values are driven by barriers to supply and rising replacement costs–commodities, natural resources and real estate securities. To help manage volatility, the authors pair these categories with diversifiers that have shown different return profiles and low correlations with one another.

Also through the paper, the authors provide a perspective on their research into the drivers of inflation and the design of our investment framework. In their view, this systematically diversified mix of real-asset categories that can provide DC plan participants with an effective tool for enhancing diversification, hedging against the long-term effects of inflation, while providing attractive total return potential.