In a world of financial complexity and persistent inflation uncertainty, Toby Watson argues that the case for real assets has never been more straightforward – or more frequently misunderstood.
Financial assets dominate most private wealth portfolios, yet the risks they carry – inflation erosion, sentiment-driven volatility and correlation convergence under stress – are precisely the risks that real assets are best positioned to address. Commodities, real estate, infrastructure and timberland share a fundamental characteristic: their value is anchored in something physical rather than purely in financial market sentiment. Toby Watson, whose career has encompassed hard asset lending, infrastructure financing and multi-asset portfolio construction, brings a grounded and analytically rigorous perspective to the role real assets should play in modern wealth portfolios.
Real assets encompass a broad range of investments whose value derives from physical characteristics rather than financial claims. Farmland, timberland, commodities, real estate, infrastructure and natural resources all fall within this category, as do certain types of structured lending backed by tangible collateral. What unites them is a connection to the physical economy that provides a degree of insulation from the purely financial dynamics driving equity and bond market volatility. Toby Watson has worked with real assets throughout his career and sees their role in modern portfolios as both underappreciated and increasingly important given the inflationary dynamics of recent years.
Why Real Assets Deserve a Place in Modern Portfolios
The case for real assets is most easily made by examining what they offer that financial assets cannot. Equities represent claims on corporate earnings subject to economic cycles and competitive dynamics that are difficult to predict over long horizons. Bonds represent claims on future cash flows fixed in nominal terms, making them vulnerable to inflation in ways that are not always fully appreciated until inflation actually arrives.
Real assets offer something qualitatively different. A piece of productive farmland generates output whose value tracks the real economy over time. Infrastructure assets earn revenues, often explicitly linked to inflation indices. Commodity exposure provides direct access to the supply and demand dynamics of physical markets that underpin the broader economy. These characteristics do not make real assets immune to volatility, but they mean that their value is anchored in a way that purely financial assets are not.
Toby Watson has long argued that portfolios lacking meaningful real asset exposure are implicitly betting that financial assets will adequately preserve purchasing power across all market environments. That bet proved costly during the most recent inflationary episode – and it is a bet that Toby Watson sees no compelling reason to make.
Are Real Assets a Reliable Inflation Hedge?
The honest answer is that it depends on the specific asset and the nature of the inflation. Toby Watson, whose experience at Goldman Sachs included extensive work in hard asset lending and infrastructure financing, has noted that real assets vary considerably in their inflation sensitivity. Infrastructure with explicit CPI linkage provides direct inflation protection. Commodities tend to be positively correlated with inflation over medium-term horizons, though they can be volatile over shorter periods. Real estate provides inflation protection through rental income growth and asset appreciation, but the relationship depends heavily on leverage, location and the interest rate environment. Understanding these distinctions is essential for using real assets effectively as an inflation hedge, rather than simply assuming the label guarantees the outcome.
How Toby Watson Thinks About Real Asset Allocation
Toby Watson’s approach to real asset allocation begins with a clear identification of what role each asset is intended to play within the broader portfolio. Real assets are not a monolithic category – they serve different purposes, carry different risk profiles and behave differently under varying macro conditions. Conflating them into a single allocation decision produces a portfolio that may or may not deliver the intended benefits.
At Rampart Capital, where Toby Watson serves as partner, real asset allocations are evaluated through the same factor-based analytical framework that governs the rest of the portfolio construction process. The key questions are: what are the underlying return drivers of this asset? How does it behave under inflationary versus deflationary conditions? What is its liquidity profile and how does that interact with the rest of the portfolio?
Toby Watson’s years at Goldman Sachs, working across hard asset lending, structured finance and principal investing in physical assets, gave him a practical understanding of these questions that directly shapes his current approach to real asset portfolio construction.
The Liquidity Challenge in Real Asset Investing
One of the genuine constraints of real asset investing is liquidity. Physical assets – farmland, timberland, direct real estate, infrastructure – cannot be sold quickly without accepting significant discounts. Toby Watson has consistently argued that this liquidity constraint should be treated as a feature to be managed rather than a reason to avoid real assets altogether. The illiquidity premium available in direct real asset ownership is real and has historically been meaningful for investors with genuinely longtime horizons. The key is ensuring that the illiquid portion of the portfolio is appropriately sized relative to total liquidity needs – a discipline that Toby Watson applies rigorously in practice.
Real Asset Sub-Categories Worth Understanding
The real asset universe is broad and varied. A few sub-categories merit particular attention:
- Farmland and timberland offer long-duration inflation linkage through the production of commodities whose prices track the real economy. These assets tend to have low correlation with financial markets and have historically provided strong real returns over long periods, though they require specialised management and carry significant illiquidity.
- Commodity exposure – whether through physical holdings, futures-based strategies or equities in resource companies – provides more liquid access to real asset characteristics, at the cost of higher short-term volatility and a return profile more sensitive to financial market dynamics than direct physical ownership.
Toby Watson has noted that the appropriate mix between liquid and illiquid real asset exposure depends on the investor’s overall portfolio liquidity position, time horizon and the specific macro environment. There is no single correct answer, only a more or less well-reasoned one given prevailing conditions.
Toby Watson on Tangible Value in an Uncertain World
The appeal of real assets is ultimately straightforward: in a world where financial asset valuations are subject to sentiment and monetary policy dynamics that can shift rapidly, tangible assets with genuine economic utility offer a form of value that is harder to erode. Toby Watson’s perspective, informed by his experience at Goldman Sachs and his current role at Rampart Capital, is that real assets earn their place in modern portfolios through the steady, compounding contribution of assets whose value is grounded in the physical world. For investors serious about long-term wealth preservation, that grounding matters considerably more than it is often given credit for.
