Many institutional portfolios have made the structural shift toward higher allocations to real assets. In this paper, we address how public pension plans specifically can build or enhance their real asset portfolios. We define the asset class and, using model portfolio analytics, consider the right size and the role of real assets for various investment objectives.
Because the question of the funding source for a new real asset allocation has considerable consequences for portfolio metrics, we run a constrained-optimization analysis to determine how to fund such an allocation and identify portfolios on the efficient frontier. We find that, depending on the funding source for a new real asset allocation, the improvements to a portfolio toggle among more dampening of asset volatility, more return enhancement or a combination of the two. We conclude real assets may help public pension plans improve the probability of meeting and exceeding lofty return targets, mitigate portfolio