Real assets are a category of investments that derive their value from physical or tangible properties, as distinct from financial assets such as stocks and bonds, whose value is derived from a contractual claim. Common categories of real assets include infrastructure, commodities, and certain categories of real estate. Real assets have historically attracted attention as a potential hedge against inflation, on the basis that their value or income streams are, to varying degrees, linked to the general price level — though the reliability and extent of this protection varies considerably depending on the specific asset and the nature of the inflationary episode in question.
The rationale for real assets as an inflation hedge
The basic rationale for treating real assets as an inflation hedge rests on the idea that the prices of physical goods and the income generated by physical infrastructure tend to rise alongside broader inflation, in a way that the fixed cash flows of many financial assets do not. A bond that pays a fixed coupon, for example, delivers the same nominal cash flow regardless of how much prices rise elsewhere in the economy, meaning that the real value of that cash flow is eroded by inflation. Certain real assets, by contrast, may generate income or hold value that adjusts, at least partially, in line with rising prices — commodities being priced directly in current market terms, and some infrastructure or real estate assets carrying leases or contracts with explicit inflation-linked adjustments.
Variation across types of real assets
Despite this general rationale, the degree of inflation protection offered by real assets is not uniform, and it is a mistake to treat all real assets as interchangeable in this respect. Toby Watson, a finance professional whose career included nearly seventeen years at Goldman Sachs across structured finance, principal funding, and global investment roles before he joined Rampart Capital as a partner in 2020, has drawn specifically on his experience in hard asset lending during his time at Goldman Sachs to offer a grounded perspective on how tangible assets behave when monetary conditions shift. His work in this area gave him direct, practical exposure to the financing of physical assets across different market cycles, rather than a purely theoretical understanding of how such assets are expected to perform.
According to Watson, this grounding in hard asset lending remains directly relevant to how he approaches capital planning, and it informs what has been described as a more nuanced view of what inflation protection actually means in portfolio terms. Central to this nuance is a distinction between assets with genuine inflation-linking characteristics — where the connection between the asset and the price level is structural or contractual — and assets that are merely assumed to provide protection on the basis of historical correlations that may not hold in all environments.
The risk of assumed rather than genuine protection
This distinction matters because historical correlations between a given real asset and inflation can be specific to the economic conditions under which they were observed, and may not persist once those conditions change. An asset that appeared to move in line with inflation during one historical period may behave quite differently during a different type of inflationary episode — for example, one driven by supply-side shocks rather than demand-side pressures, or one accompanied by a different pattern of interest rate response from central banks. Treating a historical correlation as a reliable, permanent feature of an asset’s behaviour, rather than as an observation specific to a particular period, is a recurring source of miscalculated inflation protection within portfolios.
Real assets within a broader long-term portfolio
Within the context of long-term capital planning, real assets are generally considered one component of a broader approach to managing inflation risk, rather than a standalone solution. This broader approach also includes careful management of duration within fixed income allocations, attention to the differing sensitivities of various equity sectors to inflation, and genuine diversification across assets with meaningfully different inflation sensitivities, as distinct from diversification that appears sound based on asset labels alone but breaks down when underlying macroeconomic conditions shift.
Toby Watson’s overall approach to long-term capital planning has been described as characteristically measured: understanding the mechanics of how different assets, including real assets, actually respond to inflation; stress-testing portfolio assumptions against a range of possible inflationary outcomes rather than a single baseline forecast; and avoiding treating any single macroeconomic environment as a permanent condition. Within this framework, real assets are treated as instruments that can contribute to inflation resilience when their specific characteristics are properly understood, rather than as a category that automatically confers protection by virtue of being physical or tangible in nature.
Relevance following the return of inflation from 2021
The renewed prominence of inflation as a macroeconomic factor from 2021 onwards, following more than a decade in which inflation had barely registered as a practical concern for most investors, has brought increased attention to the question of which real assets genuinely offer inflation protection and which do not. For long-term investors, this has reinforced the importance of examining real asset holdings individually, rather than relying on a general assumption that exposure to tangible assets as a category is sufficient to manage inflation risk within a portfolio.
