Filed Pursuant To Rule 433

Registration No. 333-180974

September 24, 2013

Real Assets advertising supplement posted on www.pionline.com

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SEPTEMBER2013 SPONSOR DIRECTORY CONTENTS Parametric Clifton 1918 Eighth Avenue, Suite 3100 Seattle, WA 98101 Contact: James Barrett Managing Director – Institutional Sales & Client Service 206-381-6122 jbarrett@paraport.com www.parametricportfolio.com 4 Real Assets: A Sea-Change in Approach Quantitative Management Associates Gateway Center 2 - 6th Floor Newark, New Jersey, 07102 Contact: Brad Allinson Managing Director and Head of Institutional Client Relations 973-367-5115 brad.allinson@qmassociates.com www.qmassociates.com 8 One Asset Class, Many Choices SPDR® ETFs State Street Global Advisors One Lincoln Street Boston, MA 02111 Contact: Rob Trumbull Vice President, Institutional ETF Specialist 12 Don’t Skimp on 617-664-6448 robert trumbull@ssga.com Your Strategic www.spdrs.com www.spdrgoldshares.com Discipline www.spdru.com TIAA-CREF Asset Management 730 Third Avenue New York, NY 10017 Contact: Kevin Maxwell Managing Director 212-916-4812 kmaxwell@tiaa-cref.org www.tiaa-cref.org/assetmanagement This special advertising supplement is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc. advertising supplement www.pionline.com/realassets 3

REAL ASSETS: A Sea-Change in Approach Investors Benefit from a Steady Evolution in Philosophy and Product Range he investment community, broadly tion and be quite beneficial in controlling port- speaking, has been adding real as- folio volatility and managing real risk-adjusted sets to portfolios on an ad hoc return,” says Mazza. The goal, he says, should “Tbasis over a multi-decade period,” be to improve performance across different says David Mazza, Head of ETF In- market environments for example, higher or vestment Strategy for the Americas at State lower inflation. “By fully decomposing the driv- Street Global Advisors (SSgA). “Many investors ers of risk and return, one can construct a have introduced a significant allocation to the portfolio that is resilient to different market en- real assets bucket. But they are quickly mov- vironments. Then investors can decide within ing away from a ‘bolt-on’ construction ap- their real asset blend, or within their gold al- proach that has become antiquated.” location, what long-term allocation is appro- He says that, historically, investors priate, or depending upon their outlook for a tended to take a somewhat narrow approach particular environment, how they may want to to thinking about and implementing real as- dial up or down that exposure.” sets allocations often as a residual expo- According to Mazza, appreciation for the sure within a stock or bond portfolio, or by diverse roles of real assets, combined with a adding specific assets like TIPS or commodi- need for portfolio resiliency, now has in- ties as hedges. Mazza says that over the vestors focused on exploiting the intercon- years, one discrete set of buyers might be in- nectedness of the different drivers of real terested in real assets, and gold in particu- assets. “The question from the institutional lar, because of inflation concerns. Others standpoint is now becoming, ‘What will my may have wanted to own gold because they allocations be across the entire portfolio expected a decline in the dollar. Still others And then, what processes do I need in place might have been interested in gold based on to allow for appropriate monitoring of those strong performance. allocations going forward ‘” “We now have investors who more fully appreciate that all those different reasons for introducing real assets, such as gold, into Moving Toward More Flexible, your portfolio should be thought of together,” Resilient Portfolios says Mazza. “And depending upon the par- “It’s very important to understand that ticular market environment, or depending each sub-asset class fills a somewhat differ- upon one’s particular need, real assets can ent role within the real asset portfolio,” says serve multiple purposes.” Stephen Brundage, Managing Director and Mazza says that there is an overall shift Product Specialist with Quantitative Man- in philosophy among investors in today’s agement Associates (QMA). He points out post-recession world toward risk-premia or that each sub-asset class comes with a factor-based portfolio construction and it is unique benefit and risk profile. For example, driving a change in their approach to real as- commodities are sensitive to sudden spikes sets. He says that investors are starting to in inflation, but because of their volatility they decompose the risk and return drivers of real can increase risk of drawdown. Real estate assets, and then construct portfolios with op- can have fixed income-like, income-paying timal weights towards the specific premia characteristics, but some vehicles can carry they want exposure to. private equity-like liquidity risk. “We know that introducing real assets, “It can be tough for people to wrap their such as gold, can boost portfolio diversifica- brains around the idea that a collection of 4 www.pionline.com/realassets advertising supplement

EXHIBIT 1: Commodity Futures Performace During Periods of Inflation Source: Parametric, Man Investments Quantitative Research, Bloomberg seemingly high-risk assets can actually re- blended approach to real assets strategi- cause the first investors paved the way. Fast duce overall portfolio risk,” says Brundage. cally weighted to the investor’s outlook and forward to today and in energy and infra- “But you can blend these assets in such a objectives may improve portfolio resiliency, structure, and other more mature asset way that you wind up with something that and provide a more stable volatility profile classes, an investor has a lot of choices.” looks better than the individual parts.” across multiple inflationary regimes rising , And Minaya argues that, purely based on According to Timothy Atwill, Managing Di- stable, and declining. fundamentals, the case for illiquid assets is rector of Investment Strategy at Parametric, quite strong, and as simple as the fact that “Historical data suggest that there is no The Next Evolution: there will be more people on the planet by rhyme or reason as to which real assets pro- Exposure to Pure Fundamentals the year 2050 demanding more resources. vide the most inflation protection. The only “I believe the story today about why real Given that it takes time to move the supply pattern is that there is no pattern.” He points assets are interesting, and what will drive de- curve, he believes that pure investment in in- to four periods of high inflation dating back to mand in coming decades, lies in the more elastic, productive assets is a positive place 1970, noting a lack of consistency in the re- illiquid areas like agriculture, timber, infra- to be. One example he points to is industrial sponse of various sectors of the commodity structure, and to some extent renewables,” wood consumption, which is projected to in- universe. “The past is of limited help in pre- says Jose Minaya, Head of Natural Resources crease dramatically over the next 20 years. dicting the future when it comes to inflation and Infrastructure Investments at TIAA-CREF. (see Exhibit 2 next page) protection,” he says. (Exhibit 1) “The market for these assets is still in its early “Whether it’s timber, or agriculture, or en- Brundage notes that, “What is driving the stages, but it offers investors something they ergy, we are agnostic as to where the addi- price of soybeans probably has little to no cor- cannot get anywhere else access to pure fun- tional supply will come from,” says Minaya. relation with what is driving the price of a mul- damentals. Whether an investor agrees with “We target diversified exposure to the over- tifamily building in Hong Kong, which probably those fundamentals or not is a separate issue. arching theme, to earn a commensurate re- has low or no correlation to the price of cop- But it’s one of the only asset classes right now turn versus the risk that we’re taking.” He per.” For that reason, he argues that real asset where you can get pure exposure to your in- says that in real assets, this could be con- investors are best served by maintaining a vestment thesis with little to no influence from sidered a “beta” type strategy. Traditional well-diversified portfolio from disparate parts capital market dynamics.” alpha-type strategies are available in real as- of the real asset universe. Because one never In Minaya’s view, the real value in real as- sets (e.g., betting on a specific region, or buy- knows how or where inflation may crop up, a sets comes from being tied to underlying fac- ing cheap assets in the hope of diverse real asset portfolio may be a particu- tors of production, in whatever theme the appreciation), though they do come with larly effective hedge against unexpected in- investor chooses, which means focusing on more risk. Minaya says that his preferred flation, one of the most pernicious threats to private and direct investments. He says, “Liq- strategy for pursuing alpha is vertical inte- asset values and purchasing power. uid public vehicles are appropriate for many gration. That is, using his information ad- “We think of real assets in terms of bal- real asset investors, but you are getting other vantage to make upstream investments in ancing exposures across all the sub-asset types of exposure tied to them.” the value chain, in areas like processing, classes,” says Brundage. “For example, com- He acknowledges that the “pure funda- packaging, transportation and storage, bining private real estate and REITS can give mental” approach to real assets is not preva- though such investments raise investors’ ex- investors the diversification they need, but at lent in the market today, mostly because it posure to capital market factors. the same time meet liquidity needs they might requires scale and resources. It can be ex- As for liquidity, he acknowledges that only have. Gold, though it has suffered a recent de- pensive to have people on the ground man- a sub-set of investors may be capable of cline, tends to do well during times of insta- aging these assets, and it can be expensive making long-term illiquid investments. But he bility and can supply a tail risk-hedging to buy assets that are often very lumpy. But points out that liquidity is a relative term. “If dimension to the portfolio. TIPS, though they he sees parallels with the growth of real es- you buy a core asset like a transmission line, may not look attractive right now from a real tate as an asset class over the past several or a bridge, or energy assets, there is liquidity return point of view, offer long-term inflation decades. “You didn’t start out with REITs, and inherent in that asset because someone can protection.” public securities, and investible indices,” touch it and see the cash flow coming out of SSgA’s David Mazza argues that a says Minaya. “All of those came about be- it,” says Minaya. “A green-field or pioneer type continued on page 6 advertising supplement www.pionline.com/realassets 5

EXHIBIT 2: Industrial Roundwood Consumption, 1964-2030 continued from page 5 of investment will be much less liquid than even the exact same assets in the rest of the NOTE: Post 2015 projections: Solid lines are projections from the United Nations Food and Agriculture Organization farmland in Illinois or timberland in Oregon.” portfolio. For example, real estate or natural based on 2005 consumption levels (left scale); Dashed He argues that during the financial crisis, resource equities are contained to a certain lines are 2005 projections scaled using 2010 consumption investors could have sold bonds at a signifi- extent in a public equity portfolio. He says (right scale) Source: TIAA- CREF, UN-FAO cant discount, but the value of tangible as- that, “If investors don’t take that into account sets did not suffer such drastic devaluation. when constructing the portfolio, or giving “Today, for example, in farmland the illiquid marching orders to managers, they could un- issue is more buying than selling especially intentionally end up with a double represen- if you want marquee assets that are going to tation of energy sector stocks, real estate be more liquid and even more defensive in a stocks, etc.” down market.” He reminds investors that, “In With regard to inflation hedges, Atwill ar- times of stress, if you can’t go to equity or gues that they are intrinsically problematic. debt markets, the only currency on your bal- Most inflation is unpredictable, otherwise it ance sheet may be hard assets. We saw this tends to rapidly get priced in by markets. happen in Brazil during the financial crisis Thus, he recommends close monitoring and where a lot of farmland was sold because it explicit guidelines for active management: “Ac- was the best currency they had at that time.” tive managers make concentrated bets. If these bets don’t expose you to the exact infla- Four Investor Cautions tionary pressures at the exact right time, then you haven’t really gotten the returns you were in the New Era of Real Assets hoping for, and this may result in less protec- Parametric’s Timothy Atwill notes that as tion than back-tests based on historical index the range of real assets and strategies con- returns would indicate.” tinues to expand, the portfolio construction Finally, asset class dynamics can change exercise can get quite complex. as new investors come in. “We should not be First, he counsels investors to be aware expecting the same upside we’ve seen histor- of the potential modeling error in real asset ically,” says Atwill. He uses bank loans as an return streams. “Almost every single real example: “The sector was well known to be un- asset class has a relatively short history, correlated and have low volatility, until it be- based on very small amounts of invested as- came highly liquid. Now it is experiencing sets,” he says. “The GSCI commodities higher volatility and has become higher beta.” benchmark was only created in the 1990s, He anticipates that over the years, as liquidity and back test results for this index to the improves in real assets, their liquidity premium early 1970s may not truly be representative and correlation benefits could potentially di- of the commodity return stream, as the uni- minish somewhat. “You’re getting paid for a verse and investor base changed dramati- certain degree of liquidity give-up, which is ma- cally since that period. REITs are also a terial in some cases. The extent of that liquid- relatively new invention. For TIPS, investors ity give-up might be diminished as more dollars try to use the historical break-even inflation flow into real assets, and investors may get rate to create synthetic historical prices, be- paid less for it.” cause TIPS also have a short history, during Ultimately, he says: “As money flows in, which we have not seen any significant infla- asset classes tend to get more volatile and ex- tionary periods. Given all of this, there is a lot hibit more herd-like behavior. So while we al- of potential for modeling error when using ways like to say in asset management that the short return streams.” past results are not indicative of future ones, I Atwill also cautions investors to make think it’s particularly true when it comes to real sure they are not duplicating risk factors, or assets.” ~ 6 www.pionline.com/realassets advertising supplement

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One Asset Class, Many Choices Real Asset Allocations Are not Turnkey – They Are as Flexible as Investors Are Different e tend to favor grouping real assets terms, real assets tend to fall between equi- together and considering them their ties and fixed income, but closer to equities. own segment of the portfolio,” says So allocating from fixed income, while adding Edward Campbell, Portfolio Man- to the portfolio’s real return potential, may in- “Wager with Quantitative Management crease overall volatility. That needs to be ex- Associates (QMA). “But within that philo- amined and the tradeoffs weighed.” sophical view, there is no ‘optimal’ number David Mazza, Head of ETF Investment you could come up with for an allocation. It Strategy for the Americas at State Street depends on factors such as the diversity and Global Advisors (SSgA), says that, “A lot of folks composition of the existing portfolio, the na- moved into real assets for one discrete need, ture and preferences of the investor, and and now they are thinking about real assets their concerns and expectations for the fu- from a broader perspective, understanding ture. A reasonable range could be anywhere the role that they can play from a diversifica- from 5% to 20% of the overall portfolio.” tion standpoint.” And in that broad context, he One of the first issues that real asset in- observes that investors have wide latitude in vestors face is not what to invest in, but choosing assets to meet their goals. where to allocate from. “It’s going to come He asks: “Is your goal just merely to from your traditional portfolio,” says Camp- match inflation Is it to beat inflation by bell. “Some from equities and some from some amount Then you should have a real bonds.” But here, all the factors mentioned asset portfolio with the underlying weightings above come into play, raising potentially dif- that increase the probability of reaching that ficult tradeoffs. “Campbell uses the exam- goal.” But he notes that within the real asset ple of a common objective for real assets: universe, while all sub-asset classes can delivering real return and preserving pur- have a role in inflation protection, they vary chasing power. He starts with a counterin- from low risk to high risk i.e., from TIPS, to tuitive observation: “Purely in terms of real gold, to real estate, and to natural resource return, stocks are probably the best ‘real equities. The inflation protection, return, and asset’ you can get,” he says. “In other words, downside potential of each asset is different, stocks have the highest expected return and they all need to be managed together after inflation.” within the real asset allocation. Further, the He says that for such an investor, espe- total real asset allocation has to be managed cially in the context of current valuations in eq- in the context of the investment policy for the uity markets versus fixed income, there is a overall portfolio. reasonably strong argument to be made that “For example, investors who emphasize a disproportionate amount of the real asset riskier real assets those with a higher allocation should come from the fixed income volatility and return profile may consider re- side of the portfolio. He notes, however, that ducing their equity weight proportionately,” investors must then consider the volatility im- says Mazza. “Investors emphasizing lower pact. According to Campbell, “In the simplest risk assets such as inflation-linked bonds 8 www.pionline.com/realassets advertising supplement

“We tend to favor an approach where you group real assets together and consider them their own segment of the portfolio. But within that philosophical view, there is no ‘optimal’ number you could come up with for an allocation.” Edward Campbell, Portfolio Manager Quantitative Management Associates (QMA) may consider funding the allocation from the systematically higher inflation, or at least next, but the tradeoff is that they trade like fixed income side of the portfolio.” higher inflation expectations. Yet, today infla- publicly listed stocks, which is going to have tion expectations remain very subdued and some of its exposure driven by equity mar- Allocation Challenges Are contained, because many sectors of the kets.” He points out that during the crash of a Symptom of the Times economy are still in an extended process of 2008-2009, REITS were hit harder but re- deleveraging. “We’re now approaching an en- covered more quickly than private real estate. According to Timothy Atwill, Managing Di- vironment where the economy seems to be Campbell says that these kinds of trade- rector of Investment Strategy at Parametric, on somewhat surer footing,” says Mazza. “Ob- offs and choices are present in just about the answers he is seeing to the allocation viously downside risks remain. But if we move every sub-asset class within the real asset question are a “symptom of the times.” A lot toward significant inflationary pressures, the universe. In the case of commodities, he says depends on the investors’ view of risk across need to have assets like gold in portfolios that futures provide investors with a unique the full spectrum of assets in which they are could be very significant. From an institu- correlation profile, which may offer a good currently invested. tional context, or even from the point of view hedge against unexpected spikes in inflation, “Many investors are taking assets out of of investment advisors and the retirement while also providing a hedging premium. “We fixed income, primarily due to their outsized market, as the investment time horizon of re- think commodities futures are a more direct fears about the current rate environment.” He tirees decreases with age, they will need port- way to access pure commodity price risk than says that investors are so afraid of losing folios that are much more resilient to through the stock market,” says Campbell. money in fixed income that they are almost inflation, merely to maintain their purchasing “Then again, natural resource equities tend happy to move assets out of bonds. On the power.” to have some correlation with the underlying other hand, he says, “In terms of a risk Mazza believes this is a powerful secular commodities while offering a better longer budgeting exercise, if people are more in- case for more sizable allocations to real as- term return profile over time.” formed about their overall risk tolerance, sets than investors are accustomed to mak- The explosion of new vehicles gives in- they are taking assets out of equities. But ing. “It may be years away, but I believe that’s vestors more options, but they all come with it’s a very difficult exercise for investors to why we’re seeing money begin to move in this cautions and tradeoffs. ETFs, for example, separate the two allocation drivers, in terms direction, and then begin to move from tacti- are liquid, relatively low-cost vehicles. “But of interest rate sensitivity versus the risk cal to strategic.” you’ve got to be careful with ETFs that you budgeting dynamic.” know what exposure you’re getting,” says According to SSgA’s David Mazza, the an- Choices and Tradeoffs Campbell. “Some commodity ETFs provide swer to the allocation question often hinges Across the Real Asset Universe exposure to commodity futures, while some on an investor’s specific outlook. “Some in- Even as the secular case for real assets are tied to natural resource stocks. In the vestors are delegating the broad real asset continues to strengthen, investors still face case of gold for example you can get expo- bucket to outside managers,” says Mazza. the challenge of filling out that allocation, sure to gold bullion prices through ETFs, ver- “But other investors are saying that they want from a universe that offers many disparate sus investing in something that gives you exposure to each one of these real assets in choices. access to the futures market. And with some a way that allows them to introduce greater According to QMA’s Edward Campbell, “In exchange-traded products, like ETNs, you’ve or less exposure depending upon their par- real estate, for example, private real estate got counterparty exposure, sort of like a ticular outlook.” funds give you better diversification, but the swap.” A chief fear, he says, is that the economy tradeoff is that you have less liquidity. It’s pos- Parametric’s Timothy Atwill says that, “At will at some point shift into an environment of sible to buy REITS one day and get out the the end of the day all investors are very com- continued on page 10 advertising supplement www.pionline.com/realassets 9

continued from page 9 fortable with the idea of investing in equities. tion. But they are also looking for an asset And given a choice between an asset like that provides better correlation or diversifi- natural resource equities versus commodi- cation benefits in their portfolio. And they’re ties, in their heart of hearts they would prob- looking for a different volatility profile or ably rather take the equities, because they some income-paying type of approach.” understand that market. It’s a public market, Where he sees significant differences is it’s traded during trading hours, they can get on the question of how one goes about get- their money in and out, and they can explain ting those exposures. He says that an in- it to their board very easily.” vestor’s objective will dovetail with a specific He says that when investors think approach to real assets that may be more or about adding commodities, all of a sudden less focused on inflation beta, or providing they face issues they are less comfortable more of an alpha or absolute return type of with, like derivatives investing and the un- strategy. “Your objective may be best served derlying supply and demand dynamics of by a lower-return strategy that is invested in specific assets. There is no company man- a very low risk part of the real asset spec- agement to deal with, nor an earnings trum, clipping a small coupon and earning stream that they can look at and assess. single-digit-type returns. A higher return tar- The lack of familiar characteristics can get would obviously dictate going into a dif- cause a lot of discomfort. ferent type of either sub-asset class or Yet, he says, investors see a compelling operating style.” rationale for being in assets like commodi- Yet, according to Minaya, regardless of ties. “If inflation goes up 1%, commodities which specific benefits investors are seeking will go up somewhere between 15% and in real assets, private ownership in sub-asset 30% depending on the study you’re looking classes are more readily suited to investors’ at,” says Atwill. “That’s a primary reason why goals. “That being said, not everybody can investors believe that if they are going to do do it,” says Minaya. “Liquid funds are closer any amount of real asset investing, they to short-term private equity driven strategies, might as well go into commodities. Com- where private ownership takes a very long- modities will give them better inflation pro- term view on pure fundamentals and makes tection for every dollar invested, compared a commitment to ride out multiple economic to an asset like TIPS, where the protection cycles. With private ownership, you’re going extends mostly to the dollars invested in to have the ability in down cycles to preserve TIPS.” capital expenditures, not take big losses, and The challenge for a medium-sized pen- still be there when the markets come up in sion plan that wants a real asset allocation supply, or when inventories adjust.” is that they have neither sufficient funding He uses the example of corn futures, nor expertise to fund up and then manage which are a financial product, compared to discrete allocations across all the sub-as- a real asset like farmland. A financial instru- sets, which include such disparate choices ment like corn futures is driven by supply and as timber, farmland, TIPS, commodities and speculative activity in the market. The value direct real estate, just to name several. of a hard asset like farmland is not neces- “There’s just not enough assets in the plan sarily tied to the price of the commodities it to fund a robust ‘standalone’ exposure to produces. And the asset can be deployed, or those individual asset classes, and there’s a not, in an uncorrelated way with changes in wide range of complex allocation issues to the broader market (e.g., planting different address. So, instead, they look for a full, or crops when the price of corn declines). at least a one-stop-shop-type solution, For institutions with sufficient resources, where they can get multiple real assets, in accessing private ownership through joint ven- relatively liquid vehicles, with attractive and tures, private investment companies, and transparent pricing.” other “shared governance structures” can be a very attractive option. Minaya says that such Options for Capturing a Long vehicles have a mandate to grow assets, build out and leverage specialized investment plat- Term Fundamental View forms, and generate their own deal pipeline. “The types of exposure one can get With these vehicles, institutions become more within that broad category of ‘real assets’ like co-investors than simply passive buyers of can vary a lot,” says Jose Minaya, Head of asset management services. Natural Resources and Infrastructure Invest- “Today, I think what investors are looking ments at TIAA-CREF. “You may be in a more for in real assets is driving them toward more traditional private equity type of exposure private ownership structures, where you are versus one that plays a long-term theme on seeing more managers and institutions creat- inflation or demographic trends. I think gen- ing investment products that might not be liq- erally when we speak to investors, across the uid, but at least capture that longer-term, board people are looking for inflation protec- fundamental view.” ~ 10 www.pionline.com/realassets advertising supplement

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Don’t Skimp on Your Strategic Discipline Real Assets Require a Steely Commitment to Riding Out the Rough Patches art of the decision making process and 86% of its value. Those are your classic for going into real assets is that, examples of just how horribly inflation can af- first of all, you should know why fect a portfolio, and just how difficult it is to you’re buying them,” says Timothy survive those sorts of scenarios.” “P Atwill, Managing Director of In- But Atwill says investors often forget the vestment Strategy at Parametric. “If you are lesson, or lack the ability to stick to the pro- using them for inflation protection, then just gram and justify the ongoing cost. Right now, like an insurance policy, there may be a cost for example, he is seeing a “remarkable de- until that policy pays off. You shouldn’t ex- parture” of investors from commodities. pect it to produce returns, and real assets “AUM growth in commodities has been pretty may even lose money over those periods much following the underlying asset returns,” where inflation is under control.” he says. Cumulative inflows into index swaps Atwill understands that in a low return en- were strong in 2010; they peaked in 2011; vironment, even investors who buy into the and have shown persistent outflows through insurance concept still need to clear a return 2012, and little movement since. (Exhibit 1) hurdle. But he thinks that if that is the key According to Atwill, “Investors need to be driver of a real asset allocation, these in- honest with themselves about the intent for vestors could be disappointed by perform- real assets. If it’s an inflation hedge, it has ance in the near term even if over the long to be a permanent part of the portfolio. You term real assets react to inflation as ex- can’t flee when the total returns are flat, or pected, when it does come to pass. He says, negative. At a certain point there is a return “If you are relatively diligent about rebalanc- seeking aspect to almost any portfolio com- ing back to your asset allocation you can ponent, one that can prompt investors to even generate outperformance because ask, ‘If this isn’t making me any money, why you’re essentially being forced to buy your am I doing it ‘ But that’s probably the exact losers and sell your winners. And so over worst time to get out of an asset class. Es- time, just by having something that’s uncor- pecially since many inflationary shocks hap- related to equities and bonds, mathemati- pen so quickly that one cannot re-allocate to cally you can show that that should generate real assets to capture some of the upside. A outperformance.” real asset investor has to be permanently ex- Yet, many investors tire of paying the in- posed in order to truly reap the inflation pro- surance premium despite a proven need. tection benefits.” Atwill points to inflationary periods of varying David Mazza, Head of ETF Investment severity, across different regions, to make his Strategy for the Americas for State Street point (i.e., the U.S. from 1972 to 1982, the Global Advisors (SSGA), makes a similar UK from 1910 to 1920, and Japan from1946 point about gold. “Investors have been build- to 1956). “In these cases, inflation ranged ing real asset portfolios with an overarching from a low of 9% to a high of 23%, and in real intent of meeting their inflation hedging terms, a traditional 60/40 portfolio with a 4% needs. At the same time, they understand spending rate would have lost between 52% that in order to do that, they also need the 12 www.pionline.com/realassets advertising supplement

EXHIBIT 1: Commodity AUM fell to its lowest since H2 2010 June Source: Bloomberg, MTN-L ETP issuer data, Barclays Research EXHIBIT 2: Forward rates declined at the same time as gold prices declined Source: FactSet, SSgA as of 4/30/2013. Past performance is not a guarantee of future results. ability to grow the portfolio on an inflation- vestors, in particular looking at the role gold rates. Gold basically moved in tandem with adjusted basis, so that you don’t erode your should play in a portfolio. According to that. And when coupled with movements in purchasing power.” Mazza, the short-term pullback has called the dollar, in our opinion that is a key reason Within this overall policy, he says, in- into question why investors made the alloca- why gold moved significantly during that time vestors are taking more strategic positions tion in the first place. “If you have an infinite period.” (Exhibit 2) in real assets, often with discrete allocations time horizon then you should probably be Mazza believes that institutions are be- to each one, in particular making a long-term thinking about your portfolio over longer mar- ginning to fully appreciate the need for a allocation to gold. And he says they know ket and business cycles. But what we are grounded risk and return objective to guide they should not necessarily throw out an seeing today is that, with an asset like gold, decision making around real assets, both for asset just because it doesn’t fit with per- many investors moved into it because they the overall asset class, and the sub-assets formance expectations over any given period, thought it was a strong tactical way to boost within it. “When we think about potentially be it, one year, three, years, or longer. portfolio returns.” moving into a rising rate environment, in- “There has been a lot of discussion about In the short term, however, real assets vestors know they may actually need to in- how gold’s price has moved this year,” says like gold can be subject to many kinds of sup- crease their allocations to something like Mazza. “Gold has come off its all-time highs ply and demand imbalances, as well as fi- gold because it can help diversify the portfo- quite significantly. It’s down this year as well, nancial market factors. Of gold’s recent lio. Based on this diversification potential, but previous falls of this scale have actually pullback, Mazza says, “It was driven by a con- and the resiliency it can add to a portfolio, in- led to very strong subsequent rallies.” fluence of events. One important driver being vestors should not forget that the thesis for a He says that what he sees occurring now the rapid decline in near-term expectations long-term strategic exposure to an asset like is a reassessment of real assets by many in- for inflation, as proxied by five-year forward gold is powerful.” continued on page 14 advertising supplement www.pionline.com/realassets 13

continued from page 13 Real Asset Allocations Should be He believes that the third scenario is the Ruled by Realism and Patience most likely one. “During the eighties and the nineties in- “Nobody ever rings a bell to tell you, ‘OK vestors felt no need to look beyond the now we are in a new environment,’” says 60/40 traditional portfolio, because both of Stephen Brundage, Managing Director and those components were delivering double- Product Specialist with Quantitative Man- digit returns,” says Edward Campbell, Port- agement Associates (QMA).“Investors need folio Manager with Quantitative Management to maintain some percentage of their port- Associates (QMA). “But a secular bear mar- folios in assets that do well in periods of ket in equities and depressed yields on fixed high and rising inflation. And despite any income have been an unwelcome reality short-term underperformance in specific as- check.” sets, those inflation hedges need to be di- According to Campbell, the same can be versified, because you never know when said for real assets. He cautions that in- and where inflation is going to crop up.” vestors’ return expectations were condi- He says that it’s the role of the manager tioned by a decade in which commodities to use diversification to try to lessen the had fantastic returns, and real estate deliv- cost of that insurance during periods of ered strong performance as well. “If you market volatility, building portfolios that aim look at the year-to-date performance of to reduce risk and not just traditional risk TIPS, for example, through the end of June measures like standard deviation, but also maximum drawdown. “We try to make sure they were down almost 7.5% and currently we have a diversified basket of real assets “These are long-term exhibit negative real yields,” says Campbell. to minimize any potential short-term pain, “So they’re not very attractive on a tactical while also delivering the real returns that assets and you have basis. They are guaranteed to provide infla- clients are expecting.” tion protection through principal and inter- to take a Jose Minaya, Head of Natural Re- they est adjustments, are expensive. but ” as an insurance policy sources and Infrastructure Investments at long-term view TIAA-CREF, says, “The most important con- He says that real estate participates in sideration for us is that these are long-term If you bought into the real growth of the economy and has assets and you have to take a long-term been shown to preserve purchasing power view if you’re going to invest especially if a long-term thesis, over time, as well as provide an attractive income yield. And while it has done reason- you are pursuing direct investment in pro- then stick with it.” ably well this year, it has not done nearly as ductive assets.” He argues that the best well as the S&P 500. And the broad com- way to protect your downside is to buy into modities indices were down more than 10% income producing assets, rather than buy- Jose Minaya, Head of through the end of June. ing into a promise of future capital appreci- Natural Resources and “I think many of the sub-asset classes ation. It also helps to build a real asset Infrastructure Investments portfolio that is diversified across and within the real assets category have been TIAA-CREF pretty disappointing as of late, particularly if within sub-asset classes, both regionally people’s expectations are based on the re- and by end product. turns from the decade of the 2000s,” says He says that investors will experience Campbell. He believes this is a key issue for periods where supply shocks may bring investors: on what are they predicating their asset values below the long-term trend line. performance expectations going forward, There will also be periods when constraints and what are they hoping to achieve and demand outpace supply, driving values Campbell believes, however, that the up. Adds Minaya, “We’re seeing that today more important issue is an investor’s con- in some of these natural resources. But we cern about inflation, given that a likely eco- don’t readjust the strategy.” He says that nomic scenario is some sort of unexpected the overall cycle supporting the value of pro- spike in inflation. “There is currently an ex- ductive assets is very long, and these as- traordinary amount of stimulus in the sys- sets exhibit both inelastic demand and tem,” says Campbell. “Normally that winds inelastic supply independent of periods up in a race to the bottom in terms of who when supply-demand dynamics may push can get the cheapest currency. And nor- values away from the historical trend line. mally when you have a race to the bottom “These are hard, sticky assets and they for the cheapest currency you wind up with don’t lend themselves very well to a trading some type of inflation in the system.” mentality. So the caution for investors is He says that unwinding the current that this is not something you try to trade in loose monetary then stick with it. Independent of any narios: a smooth and perfect unwinding; a short-term shifts you may see, over the long rapid pullback on stimulus that creates a term you’re going to have a reversion to the drag on growth, and an overly cautious un- mean in the overall trend line, because the winding that fails to keep inflation in check. supply curve does shift eventually.” ~ 14 www.pionline.com/realassets advertising supplement

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