PM Spotlight: Real Returns and the Revenge of Commodities

Q: Have you always managed multi-asset strategies?

Matthias: I started out in fixed income within asset liability management at an Austrian bank. That's when I got interested in investments more broadly. I had earned a master’s degree in corporate finance in Austria. When I came to London, I finished the CFA program and then earned a master’s degree in financial engineering from the University of London. I liked it so much I decided to complete my Ph.D. in mathematical finance. So, after starting out on the fundamental side with more of a traditional finance education, I then focused on the quantitative side. Now, after more than 20 years of watching the industry cycle between fundamental and quantitative trends, I realize blending the two has allowed me to be more balanced and open-minded.

Rushabh: I hadn’t actually planned on investing as a career path. I’d always wanted to be a pilot, but that changed after the Global Financial Crisis when most airlines stopped funding pilot training schemes. I was quite mathematically driven in school, so I pivoted to studying physics. My school was participating in a government program that gave us 500 British pounds or so to invest, and that was my first exposure to the markets. When I started to look for work experience, I realized my quantitative background aligned quite nicely with the multi-asset approach. Initially, I started out in portfolio construction and investment strategy roles and eventually found an opportunity with Allspring’s predecessor firm, Wells Fargo Asset Management. I also went on to earn my master’s degree from the same mathematical finance department as Matthias, the University of London.

Q: How does the Multi-Asset team manage such a broad range of strategies and across asset classes?

Matthias: We’ve always had a broad range of exposures, but we expanded with more outcome-oriented investment strategies, more alternatives exposure, and more tail risk management over the past 10 years or so. We can combine these strategies, like basic building blocks, to reflect the clients’ needs. That allows us to aim for a lot of different outcomes.

It also allows us to adapt quickly as markets and macroeconomic regimes shift and as the industry evolves. Our team is also quite diverse in terms of skillsets. Some team members are more quantitatively interested or very strong on the operations side. Others are good with clients or highly skilled at research. I think that makes us work better together, and it makes the work very exciting.

Rushabh: A defining feature of the team is how deliberately we lean into each other’s strengths and interests, and I think that’s quite unique. There’s a strong culture of collaboration but also of individual ownership. Innovation is actively encouraged. If someone has a particular research interest, the team supports dedicating time to it.

We’re very intentional about how we allocate our time, which naturally leads to a high degree of cross-training. Over time, that builds both depth and breadth across the team, allowing us to operate effectively across a wide range of strategies and asset classes.

We can combine these strategies, like basic building blocks, to reflect the clients’ needs. That allows us to aim for a lot of different outcomes.

Q: Are you seeing growing interest in real return strategies given the continued focus on inflation protection?

Rushabh: We have started to see more interest in inflation-related strategies, including real return, mainly because of the experience of 2022 and the potential for more inflation volatility as we look out further. Every investor needs inflation protection in some form—whether they’re an insurer managing a liability book or a worker saving for retirement, inflation is a critical component from a total portfolio perspective.

We want to perform well when inflation is outside the norm while behaving broadly in line with a similar risk profile in more typical environments. We think our approach to real return is quite distinctive. Rather than trying to precisely forecast inflation, we believe building the optimal asset allocation to maximize real returns relative to a client’s local inflation index is a better approach. That means looking beyond just inflation itself and considering how broader structural forces, such as deglobalization or advances in artificial intelligence (AI), could shape the inflation backdrop over time.

Matthias: These are more structural, long-term shifts rather than one-off events, and they will likely continue to raise prices. We’re seeing some investors like big pension plans revise their investment benchmark from a typical equity/fixed income type of benchmark to something that reflects the local inflation, which gives them more of a total portfolio approach. They’re realizing that a traditional benchmark may not properly reflect the true outcome they would like to achieve.

Q: How do investors use real return strategies in their portfolios?

Matthias: As Rushabh was saying, all investors are affected by inflation. Workers who want to retire someday need help with real wealth accumulation. This is where a real return strategy can be a core building block for accumulating wealth in a defined contribution plan preretirement but also postretirement for wealth preservation and to help them ensure they don’t outlive their savings. We think real return strategies could offer a more consistent and safer approach for retirement savers.

Rushabh: Real return also has the potential to diversify an investor’s growth exposure, which is usually from their equity portfolio. The biggest risk to a diversified equity portfolio in the short run is typically inflation. So, real return can play a role in helping diversify the growth exposure during accumulation and then an even bigger role in diversifying inflation risk during the postretirement decumulation stage to reduce the risk of overspending.

We also see institutional investors use real return strategies for their inflation exposure. Most inflation strategies have quite a lot of illiquidity risk. Commodities can be highly liquid and can help offset inflation risk, but investors are often underinvested in commodities. When they do invest, they tend to rush in when inflation is going up and rush out when it’s going down, which happened recently with gold. Gaining commodities exposure through a real return strategy may be more efficient and could even take advantage of that kind of market behavior.

In fact, our own work on real return began when an Allspring portfolio manager was looking for a solution to better manage inflation exposure in his funds beyond just Treasury Inflation-Protected Securities and commodities. At the same time, we had interest from Australia for a Consumer Price Index–plus investment solution. The timing was fortuitous and led to a big research effort on inflation-sensitive assets and how to protect the downside to avoid rushing in and rushing out at the wrong times. That became the foundation of our real return strategies.

Every investor needs inflation protection in some form. Whether they’re an insurer managing a liability book or a worker saving for retirement, inflation is a critical component from a total portfolio perspective.

Q: What role do you see commodities playing in real return strategies in the current inflationary environment?

Matthias: The AI boom has led to a big focus on technology stocks, but there’s also the inputs to support this trend, including the demand for energy, copper, aluminum, and other commodities. There are huge supply and demand imbalances across many commodities, leading to inflation volatility. We see that as a longer-term trend—the revenge of commodities. The same story is playing out in some agricultural commodities. But what’s often underappreciated is how diverse this asset class is. Commodities aren’t homogenous like equities. Gold, for example, is very different from copper or oil or timber. So, you can get a lot of diversification within your commodities exposure.

Rushabh: Another underappreciated aspect of commodities exposure goes back to 2008 and the last peak in oil prices. Many investors reduced their exposure and have been reluctant to go back in. That’s effectively meant a drop in capital expenditure in commodities more broadly over the past 15 or 20 years. At the same time, it now takes much longer to establish a new mine, going from discovery to production. So, even if a new mine was started today, you’d have around a 10-year wait before actually producing any new metal. That’s meant a lot of pent-up demand. There may be short-term dislocations, but we see structural forces continuing to push real commodity prices higher over time.

Matthias: The bottom line is that, regardless of what the inflationary environment might look like down the road, tailoring an investor’s real return exposure to their local benchmark could give them a better risk-oriented approach to meet their desired outcome.

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The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. You cannot invest directly in an index.

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