The Benefits of Real Assets Diversification in Defined Contribution Plans

Transcription

1 Real Assets The Benefits of Real Assets Diversification in Defined Contribution Plans Vince Childers, CFA, Senior Vice President and Portfolio Manager Edited by Mark Adams With stocks and bonds facing the prospect of subdued returns, many fiduciaries of defined contribution (DC) plans are considering diversification options for their investment menu. We show how liquid real assets including real estate securities, commodities, natural resource equities and listed infrastructure may offer an attractive way to fill that diversification need, particularly as the market pivots away from quantitative easing and low interest rates to a policyinduced reflationary environment. Highlights An essential allocation for a new market regime: After a 35-year run of strong returns, bonds now face an uphill climb, offering little yield to offset the potential impact of higher interest rates in a strengthening economy. At the same time, stocks are trading at demanding valuations despite uncertainty around fiscal policy, rising protectionism and shifting global currents. We believe these dynamics are likely to shape global financial markets for years to come, positioning real assets to play a critical role in helping investors diversify risk, improve return potential and preserve the purchasing power of investment dollars. What are real assets? Think toll roads, shopping centers, pipelines, grains, crude oil and precious metals the structures and raw natural resources that support the basic functioning of the global economy. Many real assets investments are highly illiquid, but can be accessed through liquid publicly traded securities and commodities futures. Our study focuses on the four core real assets categories real estate, commodities, natural resources and infrastructure as well as a Diversified Real Assets Blend consisting of an equal-weighted mix of these four assets. Investment characteristics of real assets: Our analysis examines the attributes of real assets based on three primary objectives: Diversification: As a result of their different performance drivers, real assets have historically exhibited modest correlations with each other and with stocks and bonds, providing potential diversification benefits. Going a step further, listed real assets have generally performed well when both stocks and bonds have underperformed at the same time, helping to defend against otherwise challenging market environments. Total returns: Since 1991, a Diversified Real Assets Blend generated a 7.7% annualized return. (1) This is notable considering that: a) commodities which represent one quarter of the blend experienced a bear market from 2008 to early 2016 due to significant oversupply conditions; and b) real assets achieved this return over a time when inflation averaged just over 2%, suggesting that real assets can potentially deliver strong full-cycle returns regardless of the inflation environment. Inflation sensitivity: Real assets may not depend on high inflation to deliver attractive full-cycle returns, but they generally exhibit a positive association with unexpected increases in inflation, compared with the generally undesirable impact of inflation surprises on stocks and bonds. Implementing real assets in DC plans: While different real assets offer attractive attributes, they can be volatile on their own and may not excel equally across all three criteria noted above. By combining real assets together into a single multi-strategy solution, plan participants get a more balanced portfolio while benefiting from a simplified investment menu that encourages sensible allocations. Additionally, we believe the potential for added value through active stock selection and dynamic asset allocations can be an important factor in achieving investors return objectives. (1) At December 31, Data quoted represents past performance, which is no guarantee of future results. See page 11 for index representations and definitions and additional disclosures. Advisors & Investors: Institutions & Consultants:

2 The Benefits of Real Assets Diversification in Defined Contribution Plans An Essential Allocation for a New Market Regime Historically, investment menus for DC plans have been short on portfolio diversifiers, consisting largely of core equity and fixed income strategies or products that combine the two (Exhibit 1). Even target-date funds have stayed mostly within the confines of stocks and bonds. This traditional approach has generally produced attractive returns over the long run, supported by a 35-year bull market in bonds. But now, we believe bonds face a much more difficult return environment. Exhibit 1: Average Asset Allocations in DC Plans Diversifiers Stock Funds Bond Funds Balanced Funds Brokerage Window Company Stock Target Date Funds 100% 0.8% 0.9% 0.6% 1.1% 80% 60% 1.0% Diversifiers have historically represented only a small fraction of DC plan assets 40% 20% September 2012 September 2013 September 2014 September 2015 September 2016 At September 30, Source: Callan Associates and FUSE Research. Based on asset allocations of over 90 large defined contribution plans representing approximately $150 billion in assets, tracked in the Callan DC Index. Diversifiers include Alternatives/ Other, Real Estate, Real Return/TIPS and Specialty Equity. Stock funds include Emerging Markets Equity, Global Equity, Non-U.S. Equity, U.S. Large Cap and U.S. Small Cap. Bond funds include High Yield, Money Market, Non-U.S./Global Bond, U.S. Bond and Stable Value. See page 11 for additional disclosures. After years of slow growth and historically low interest rates, the global economy appears ready to accelerate amid an upturn in the business cycle and a more active mindset by policy makers, setting the stage for higher inflation and higher interest rates. As this occurs, we believe bonds are likely to suffer, making them less effective in counteracting the volatility of stocks. With stocks and bonds facing potential headwinds, we believe adding real assets to DC investment menus may help participants to better achieve their financial goals. At the same time, stocks could face challenges in sustaining near-record valuations. Healthy economic growth may provide a boost to corporate earnings, but there are still many unknowns about the impact of inflation on profit margins, as well as concerns around global calls for lower immigration, less outsourcing and higher tariffs, all of which could be negative for equities. If bonds struggle to keep pace with inflation, we expect that any prolonged underperformance by stocks could affect investors ability to meet their financial goals. And for investors who are near or in retirement and hold significant fixed income assets, this backdrop could make it difficult to generate sufficient income, arguing for broader portfolio diversification objectives. In this environment, diversifying beyond stocks and bonds could become increasingly important. In recent years, an increasing number of investors have looked to solve this problem by carving out a portion of their portfolio for real assets. Today, the universe of listed real assets has grown beyond real estate to encompass other asset classes, including multistrategy real asset portfolios (Exhibit 2). 2

3 Exhibit 2: Global Assets Under Management in Listed Real Assets Strategies $ Billions Multistrategy Real Assets Natural Resource Equities Commodities Infrastructure & MLPs U.S. / Global Real Estate $600 $ $ $300 $200 $ At September 30, Source: evestment Alliance. See page 11 for additional disclosures. Institutionally focused managers of defined benefit (DB) plans, endowments and foundations have long turned to real assets as a tool for diversifying portfolios beyond traditional stocks and bonds. A 2014 Greenwich Associates survey of institutional investors showed that many respondents had meaningful allocations to real assets (Exhibit 3). By contrast, real asset investments in DC plans were well below institutional allocations, averaging just 4%. We believe DC plans may wish to consider higher allocations to real assets, in line with institutional investors such as DB plans. Exhibit 3: DC Plans Are Under-Allocated to Real Assets Four Largest Endowments (a) Public DB Plans (b) Average allocation to real assets Endowments and Foundations (b) Corporate DB Plans (b) 6% 14% Corporate DC Plans (b) 4% 13% 22% (a) Average allocations of Harvard, Yale, University of Texas and Stanford, as reported in each university s 2015 fiscal-year annual report. (b) Source: Greenwich Associates, July 31, Based on a sampling of 28 Corporate Defined Benefit plans, 33 Public Defined Benefit Plans, 15 Endowment and Foundations and 16 Corporate Defined Contribution Plans. Allocation refers to the most frequently chosen allocation level within each group, rounded to the nearest whole number. 3

4 The Benefits of Real Assets Diversification in Defined Contribution Plans What Are Real Assets? Real assets are the structures and raw materials that allow the economy to be productive the properties where you live, work and shop; the infrastructure assets that provide power and water or that enable transportation and communications; and basic natural resources such as food and heating oil. These tangible assets typically come early in the supply chain and tend to be sensitive to changes in inflation either driving inflation themselves (such as higher energy prices) or having intrinsic value tied to replacement costs. Direct investments in real assets typically require substantial capital investment and tend to be relatively illiquid. However, by investing in products that provide exposure to commodities futures or in publicly traded equities of owner/operators within real assets industries, investors can gain access to real assets with the added benefits of liquidity and daily pricing. This makes listed real assets a wellsuited option for DC plans. These categories share certain common characteristics but represent distinct markets with different drivers of risk and return, summarized in Exhibit 4. Note that while natural resource equities and commodities futures are joined by their common tie to raw materials (oil, natural gas, copper, etc.), they are separate and distinct asset classes, and their price behaviors can be quite different. Equity performance is driven by forward-looking earnings expectations reflective of a company s business activities, whereas commodities futures, as spot assets, are primarily influenced by the near-term outlook for physical supply and demand. Exhibit 4: Defining the Four Core Listed Real Assets Global Real Estate Securities Commodities Global Natural Resource Equities Global Listed Infrastructure and MLPs Investable assets Companies that own and operate income-producing commercial real estate Energy, precious/industrial metals, agriculture and livestock Companies that own agribusiness, energy and metals & mining businesses Companies that own toll roads, oil and gas pipelines, electric utilities and other infrastructure businesses Historically supportive market environments Strong in most periods of economic growth Periods of rising levels of economic activity Forecasts of rising economic activity Varies by subsector Primary portfolio benefits Total return Income Low equity correlation Inflation sensitivity Diversification Total return Total return Stable cash flows Characteristic feature Dividend growth outpacing inflation Linked to demand/supply dynamics Lead/lag relationship with commodities Monopolistic and regulated structures Source: Cohen & Steers expectations. There is no guarantee that any market forecast set forth in this presentation will be realized. The views and opinions are as of the date of publication and are subject to change without notice. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict how long such a trend will continue. 4

5 Investment Characteristics of Real Assets In framing the discussion of real assets and their investment attributes, we emphasize three key criteria for a long-term allocation: 1. Diversification potential from distinct performance drivers that generally result in low correlations with each other and with stocks and bonds 2. Attractive return potential over full market cycles, in both high- and low-inflation environments 3. Positive inflation sensitivity to protect against the potentially damaging effects of accelerating inflation on a portfolio concentrated in stocks and bonds Looking at the core real asset categories individually, we find that each offers potentially attractive attributes but also has inherent tradeoffs. Exhibit 5 offers a generalized depiction of how different real assets have historically satisfied our three criteria. Each has had periods in which it has excelled or fallen short across one aspect or another. By combining the four core categories, we find that the whole may be greater than the sum of the parts. Exhibit 5: How Different Real Assets Have Met Our Criteria A diversified blend of real assets may help investors navigate the tradeoffs of standalone categories, potentially delivering better results over the long run. High Global Real Estate Commodities Global Natural Resource Equities Diversification Potential Total Return Potential Inflation Sensitivity Global Infrastructure & MLPs Low Diversified Real Assets Blend At December 31, Source: Cohen & Steers. The qualitative criteria in the above chart represent relative strengths across the real asset categories studied in this paper, based on realized historical data from May 31, 1991 to December 31, Diversification The distinct performance drivers of real assets have historically resulted in diversifying correlations both with each other and with stocks and bonds, as shown in Exhibit 6. Considering the attractive historical returns of real assets, these modest correlations indicate the potential for meaningful diversification benefits that may result in better risk-adjusted returns. However, we also note that correlation statistics represent a relationship between two assets over a specific period, offering little perspective into their diversifying behaviors in particular market regimes. Specifically, we believe investors can benefit from asset classes that may perform well in challenging periods for traditional financial assets, when returns for stocks and bonds are both below average. 5

6 The Benefits of Real Assets Diversification in Defined Contribution Plans Exhibit 6: 20-Year Correlation Matrix U.S. Stocks 1.00 U.S. Bonds U.S. Stocks U.S. Bonds Real Estate Commodities Real Estate Commodities Natural Resource Equities Natural Resource Equities Infrastructure Infrastructure Real Assets At December 31, Source: Morningstar. Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Correlation measures how closely two data series move in relation to one another, with a correlation of 1 representing perfect unison and a correlation of -1 representing perfect opposition. See page 11 for index representations and definitions and additional disclosures. Stocks and bonds have simultaneously lagged their respective long-term averages relatively often throughout history, occurring in 23% of rolling one-year periods since (1) Listed real assets have generally delivered strong returns during these times. Exhibit 7 shows annualized inflation-adjusted returns in periods of joint stock/bond underperformance going back to 1991, reflecting the common period of available index data. Exhibit 7: Real Returns During Joint Stock/Bond Underperformance (a) May 1991 December 2016, Annualized Real assets have generally provided an effective buffer when challenging market conditions have resulted in below-average returns for both stocks and bonds. 6% 4% 2% Bonds Stocks Diversified Real Assets Blend At December 31, Source: BofA Merrill Lynch, Bloomberg, Dow Jones, FTSE, S&P, Thomson Reuters Datastream and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. (a) The long-term average returns for stocks and bonds used to determine periods of simultaneous underperformance extends to 1973 (the first availability of sector returns in the S&P 500), measuring 6.0% and 3.7%, respectively. Returns for stocks, bonds and the Diversified Real Assets Blend since 1991 (the common period for real assets indexes) were 9.3%, 6.5% and 7.7%, respectively. The chart above reflects annualized nominal returns of the following periods, when both stocks and bonds underperformed their respective long-term averages: 2/93 2/95, 6/99 7/00, 3/01 3/02, 1/04 8/06, 8/14 5/16. See page 11 for index representations and definitions and additional disclosures. (1) As of December 31, Source: Bloomberg and Cohen & Steers. Monthly returns for the S&P 500 first became available in Index representations shown left; see page 11 for index definitions and additional disclosures. 6

7 Total Returns Real assets have shown the potential to provide attractive returns across full market or economic cycles, as illustrated in Exhibit 8. Since 1991, real estate and infrastructure stocks have outpaced the S&P 500 and produced higher riskadjusted returns, as represented by the Sharpe Ratio. (1) We also note that the equal blend of real assets produced solid returns despite a challenging environment for commodities, with lower volatility than stocks or individual real asset categories. (2) The Diversified Real Assets Blend has historically delivered strong returns with less volatility than standalone real asset classes. Returns for commodities over this time frame were affected by a significant decline in prices from 2008 to early 2016, due to the downshift in China demand and an oversupply cycle. The commodity bear market also affected returns for natural resource equities. That being said, commodities have since seen substantial improvements in supply-and-demand fundamentals due to a combination of supply rationalization and strengthening demand. We believe this trend is likely to continue through 2017 and beyond as the market moves back into a state of balance. Exhibit 8: Historical Risk and Return Comparison May 1991 December 2016 Reward (Annualized Total Return) 12% 9% 6% 3% Bonds Diversified Real Assets Blend Infrastructure Stocks Real Estate Natural Resource Equities Commodities 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Risk (Standard Deviation) Stocks Bonds Real Estate Commodities Natural Resource Equities Infrastructure Diversified Real Assets Blend Total Return 9.3% 6.5% 10.2% 1.1% 7.5% 10.3% 7.7% Volatility 14.3% 6.2% 16.7% 15.7% 18.0% 14.2% 13.1% Sharpe Ratio At December 31, Source: Bloomberg and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. See page 11 for index representations and definitions and additional disclosures. A unifying characteristic of all real assets is their positive association with unexpected inflation. Inflation Sensitivity Considering that the period since 1991 is notable for the absence of meaningful inflation, it is clear from Exhibit 8 that listed real assets have been able to generate attractive full-cycle returns even without adverse, 1970s-style inflation shocks. However, if there is one factor that has historically characterized all real assets, it is their positive sensitivity to inflation surprises. This makes them potentially valuable in helping to protect a portfolio s future purchasing power. (1) The Sharpe Ratio measures risk-adjusted performance, calculated by taking the portfolio return minus a risk-free rate (in this report, the 3-month Treasury yield) and dividing the result by the standard deviation of portfolio returns. (2) Volatility measured by standard deviation. 7

8 The Benefits of Real Assets Diversification in Defined Contribution Plans History shows that the impact of inflation tends to be most damaging to stocks and bonds when it is unexpected. Our analysis suggests that real assets tend to experience strong returns precisely during those periods, when inflation exceeds expectations. Exhibit 9 shows the annualized returns of various asset classes in periods when actual inflation was higher than what was forecasted a year earlier. These periods were identified by comparing median inflation expectations from the University of Michigan survey of 1-year-ahead inflation expectations to the actual year-over-year change in the Consumer Price Index (CPI). Exhibit 9: Annualized Returns in Periods of Unexpected Inflation May 1991 December 2016 Average Annual Year-Over-Year Returns 20% 15% 10% 5% Stocks U.S. Treasuries Diversified Real Assets Blend Real Estate Infrastructure Natural Resource Equities Commodities At December 31, Source: Bloomberg, Thomson Reuters Datastream and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Returns shown are a simple average of trailing 12-month returns when the year-over-year change in CPI at month end was greater than prior-year inflation expectation, which occurred on the following dates: 7/92, 10/92 5/93, 7/93, 1/95 2/95, 4/95 6/95, 7/96, 9/96 2/97, 9/99 2/01, 4/01 6/01, 8/01, 10/02 3/03, 5/04 8/04, 10/04 4/05, 7/05 8/06, 10/07 9/08, 12/09 3/10, 4/11 11/11. See page 11 for index representations and definitions and additional disclosures. In periods of unexpected inflation, real assets significantly outperformed stocks and bonds. Real assets also performed much better than their long-term average, contrasting with the reduced returns for stocks and bonds. The reasons stem from the economic dynamics that drive real asset performance. Owning inflation-sensitive assets may be increasingly important given the prospect of rising cost pressures in the coming years. Commodities are often direct inputs to inflation measures and generally respond to the same forces that drive prices for other goods higher, including stronger demand from increased economic activity, as well as supply constraints. Natural resource producers tend to benefit from higher prices, as they may earn higher profits on their capital base. Real estate owners generally have the pricing power to pass through higher input costs to tenants by raising rents. Higher inflation can also pressure the environment for construction due to higher costs for labor, materials and financing, reducing the incentive to add new supply. Infrastructure cash flows and asset values may have direct or indirect links to inflation. For example, some utilities and toll roads have rate escalators in their contracts tied to inflation measures. 8

9 Implementing Real Assets in DC Plans Benefits of the Blend The previous analysis shows that no single real asset class has excelled equally across our investment criteria of diversification, total returns and inflation sensitivity. However, by combining them in a cohesive investment framework, we believe investors can navigate those tradeoffs more effectively, as illustrated in Exhibit 5 on page 5. Historical analysis shows that adding real assets to a portfolio of stocks and bonds offers the potential to improve total returns for a given level of risk (Exhibit 10). We attribute these results to the distinct return drivers of the underlying assets and their individual sensitivities to the business cycle, which provide potential diversification benefits. Exhibit 10: Adding Real Assets to a 60/40 Stock/Bond Portfolio May 1991 December 2016 Diversifying with real assets has historically resulted in: 8% 6% 4% 2% Annualized Total Return Standard Deviation Sharpe Ratio higher returns % 8% 6% 4% 2% 8.9 lower volatility and better risk-adjusted performance 0.53 Portfolio Breakdown % Stocks / Bonds / Real Assets 60 / 40 / 0 50 / 40 / / 40 / / 40 / 0 50 / 40 / / 40 / / 40 / 0 50 / 40 / / 40 / 20 At December 31, Source: Bloomberg and Cohen & Steers. Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Stocks represented by the MSCI World Index, reflecting a global stock portfolio to better represent the average investor experience, which generally includes non-u.s. exposure; bonds represented by the Barclays Capital U.S. Aggregate Bond Index; real assets represented by the Diversified Real Assets Blend, as indicated on page 11. See page 11 for index definitions and additional disclosures. We believe the potential diversification benefits of real assets are likely to be even greater going forward given the increasingly challenging return environment for financial assets. 9

10 The Benefits of Real Assets Diversification in Defined Contribution Plans The Diversified Active Advantage Cohen & Steers' multistrategy approach to real assets provides diversification at the asset level, while also seeking to further enhance returns through bottom-up stock selection and a top-down asset-allocation process. Each asset class that comprises the portfolio is managed in-house by a dedicated investment team, providing separate opportunities to add value through over- and under-weights relative to the respective benchmark. Because each underlying strategy has its own investment process, this spreads the impact of active management across the sleeves of the portfolio. From the top-down, instead of using a simple equal-weighted blend of real assets, we take a strategic approach to portfolio design, setting a target allocation range for each asset class according to its investment characteristics. We then adjust these allocations dynamically based on our current market view, providing an additional lever for enhancing return potential. For the DC plan participant, we believe this approach may be superior to offering individual real assets funds, helping to reduce menu clutter while potentially providing stronger and more consistent results. We believe a multistrategy real assets option can provide an efficient way to diversify and align portfolios for the investment challenges that lie ahead. Conclusion In our view, a diversified multi-asset-class approach to real assets not only offers distinct advantages from an investment perspective, but is also consistent with the objectives of plan sponsors and participants. To summarize: A diversified, multi-asset-class strategy effectively addresses the three objectives of diversification, long-term return potential and inflation protection. For the sponsor seeking to minimize menu clutter, a single real assets option can provide a streamlined solution that encourages sensible asset-class diversification. For participants, having access to real assets may help to increase confidence in their ability to achieve their financial goals at a time of uncertainty for stocks and bonds. In our view, portfolios that are actively managed may provide an important advantage in achieving sufficient growth potential. The Cohen & Steers Real Assets Strategies 10

11 Index Representations. Unless noted otherwise, all returns and investment characteristics discussed in this report are based on the indexes below. The period from May 1991 to December 2016 was chosen based on publicly available data for all categories. Stocks: S&P 500 Index; Bonds: BofA Merrill Lynch U.S Year Treasury Index; 60/40 Mix: Weightedaverage blend of 60% stocks and 40% bonds; Commodities: S&P GSCI through July 1998 and Bloomberg Commodity Total Return Index thereafter; Infrastructure: 50/50 blend of Datastream World Pipelines Index and Datastream World Gas, Water & Multi-Utilities Index through July 2008 and Dow Jones Brookfield Global Infrastructure Index thereafter; Natural Resource Equities: 50/50 blend of Datastream World Oil & Gas Index and Datastream World Basic Materials Index through May 2008 and S&P Global Natural Resources Index thereafter; Real Estate: FTSE NAREIT Equity REIT Index through February 2005 and FTSE EPRA/NAREIT Developed Real Estate Index thereafter; Diversified Real Assets Blend: Equal-weighted blend of real estate, commodities, natural resource equities and infrastructure. Index Definitions. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. The Barclays Capital U.S. Aggregate Bond Index is an index which covers the U.S. investment-grade fixed-rate bond market, including government, corporate securities, mortgage pass-through securities and asset-backed securities. The Bloomberg Commodity Total Return Index, formerly known as the Dow Jones-UBS Commodity Index, is a broadly diversified index composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metals Exchange. The BofA Merrill Lynch U.S Year Treasury Index is composed of U.S. Treasury Notes with a 7 10 year maturity. The Datastream World Index Series encompasses global indexes of companies in their respective sectors (Gas, Water & Multi-Utilities; Materials; Oil & Gas; and Pipelines) compiled by Thomson Reuters Datastream. The Dow Jones Brookfield Global Infrastructure Index measures the stock performance of publicly listed infrastructure companies. The index intends to measure all sectors of the infrastructure market. The FTSE EPRA/NAREIT Developed Real Estate Index (net) is an unmanaged market-weighted total return index which consists of many companies from developed markets who derive more than half of their revenue from property-related activities. The FTSE NAREIT Equity REIT Index is an unmanaged, market-capitalization-weighted index of all publicly traded U.S. REITs that invest predominantly in the equity ownership of real estate, not including timber or infrastructure. The MSCI World Index is a free float-adjusted market-capitalization-weighted index that is designed to measure the equity market performance of developed markets. The S&P 500 Index is an unmanaged index of 500 large-capitalization, publicly traded stocks representing a variety of industries. The S&P Global Natural Resource Equities Index includes 90 of the largest publicly traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across three primary commodity-related sectors: Agribusiness, Energy and Metals & Mining. The S&P GSCI is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. Important Disclosures Data quoted represents past performance, which is no guarantee of future results. The information presented in this commentary does not reflect the performance of any fund or account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. The views and opinions in the preceding commentary are as of the date of publication and are subject to change without notice. There is no guarantee that any market forecast made in this commentary will be realized. This material represents our assessment of the market environment at a specific point in time, should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security, commodity interest or other investment and is not intended to predict or depict performance of any investment. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or take into account the specific objectives or circumstances of any investor. Please consult with your investment, tax or legal adviser regarding your individual circumstances prior to investing. Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers U.S. registered open-end fund carefully before investing. A summary prospectus or prospectus containing this and other information may be obtained by visiting cohenandsteers.com or by calling Please read the summary prospectus or prospectus carefully before investing. Risks of Investing in Real Assets. A real assets strategy is subject to the risk that its asset allocations may not achieve the desired risk-return characteristic, underperform other similar investment strategies or cause an investor to lose money. The risks of investing in REITs are similar to those associated with direct investments in real estate securities. Property values may fall due to increasing vacancies, declining rents resulting from economic, legal, tax, political or technological developments, lack of liquidity, limited diversification and sensitivity to certain economic factors such as interest-rate changes and market recessions. An investment in commodity-linked derivative instruments may be subject to greater volatility than investments in traditional securities, particularly if the instruments involve leverage. Infrastructure issuers may be subject to adverse economic occurrences, government regulation, operational or other mishaps, tariffs and changes in tax laws and accounting standards. Foreign securities involve special risks, including currency fluctuation and lower liquidity. The market value of securities of natural resource companies may be affected by numerous factors, including events occurring in nature, inflationary pressures and international politics. Because the strategy invests significantly in natural resource companies, there is the risk that the strategy will perform poorly during a downturn in the natural resource sector. Risks of Investing in Commodities. The value of commodity-linked derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. The use of derivatives presents risks different from and possibly greater than the risks associated with investing directly in traditional securities. Among the risks presented are market risk, credit risk, counterparty risk, leverage risk and liquidity risk. The use of derivatives can lead to losses because of adverse movements in the price or value of the underlying asset, index or rate, which may be magnified by certain features of the derivatives. Futures Trading Is Volatile, Highly Leveraged and May Be Illiquid. This is not an inducement to buy or sell commodity interests. Investments in commodity futures contracts and options on commodity futures contracts have a high degree of price variability and are subject to rapid and substantial price changes. Such investments could incur significant losses. There can be no assurance that the options strategy will be successful. The use of options on commodity futures contracts is to enhance risk-adjusted total returns. The use of options, however, may not provide any, or only partial, protection for market declines. The return performance of commodity futures contracts may not parallel the performance of the commodities or indexes that serve as the basis for the options they buy or sell; this basis risk may reduce overall returns. Cohen & Steers Capital Management, Inc. (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds. Cohen & Steers U.S. registered open-end funds are distributed by Cohen & Steers Securities, LLC. Cohen & Steers U.S. registered open-end funds are only available to U.S. residents. Cohen & Steers UK Limited is authorized and regulated by the Financial Conduct Authority (FRN ). Cohen & Steers Japan, LLC is a registered financial instruments operator (investment advisory and agency business with the Financial Services Agency of Japan and the Kanto Local Finance Bureau No. 2857) and is a member of the Japan Investment Advisers Association. About Cohen & Steers Cohen & Steers is a global investment manager specializing in liquid real assets, including real estate securities, listed infrastructure, commodities and natural resource equities, as well as preferred securities and other income solutions. Founded in 1986, the firm is headquartered in New York City, with offices in London, Hong Kong, Tokyo and Seattle. 11

12 We believe accessing investment opportunities around the world requires local knowledge and insight into specialized and regional markets. Cohen & Steers maintains a global presence through the following offices: Americas NEW YORK Corporate Headquarters 280 Park Avenue, 10th Floor New York, New York Phone Fax SEATTLE Cohen & Steers Capital Management, Inc Third Avenue, Suite 3810 Seattle, Washington Phone Europe LONDON Cohen & Steers UK Limited 50 Pall Mall, 7th Floor London SW1Y 5JH United Kingdom Phone Asia Pacific HONG KONG Cohen & Steers Asia Limited Suites , Champion Tower 3 Garden Road Central, Hong Kong Phone TOKYO Cohen & Steers Japan, LLC Pacific Century Place, 16F Marunouchi Chiyoda-ku Tokyo Japan Phone Publication Date: February Copyright 2017 Cohen & Steers, Inc. All rights reserved. cohenandsteers.com Advisors & Investors: Institutions & Consultants: VP