Revenue and Value

The ideal ‘steady’ portfolio mix is one which increases its value over the long term while generating an immediate revenue stream. For the last 50 years, one of the asset classes ticking these two boxes was Real Estate. Limited living space offered the possibility of both capital gain and rental income. However, this asset class has been increasingly supported by debt financing, pushing the ‘value’ part of the equation to excessive levels, while at the same time the revenue side struggled to keep up.

This asset class might still have bright years ahead. However, it is subject to fundamental trends such as demographics, financing availability, borrowing capacity linked to wage progression and the upkeep cost sustainability of holding property. These factors are changing, possibly clouding the positive perspectives over the medium and long term.

So, what could eventually replace this ‘steady’ revenue/value mix which has created so much wealth for Real Estate holders over the last few years?

No one asset class comes to mind. Precious metals have seen strong progression in value, but their revenue stream is non-existent. On the other side of the spectrum, the Artificial Intelligence sector for example has created great short-term value and revenue. However, over a long-term horizon, its sustainability is not so clear. Both, on the other hand, are volatile and speculative investment solutions.

Maybe the solution could come from combining these different asset classes. Bonds for example are a stable investment solution. They provide visibility on a projected revenue stream even if, to counterbalance this, their capital value is eroded by inflation. On the value creation side, raw materials, energy and precious metals could be seen as an opportune long-term wealth generating investment.

With the geopolitical landscape changing, these commodities will become increasingly strategic. Supply chains from across the world from unreliable providers could push richer nations and corporations to fully integrate their access to these raw materials, making them less available to world commodity markets. This trend could mechanically increase the probability of higher prices for this sector over the medium-long-term. On the downside, they are subject to large speculative price swings, making this asset class sometimes difficult to hold as a stand-alone asset. Combining a steady revenue stream from bonds, with a commodity asset destined to increase in value over time may be something for investors to consider. Furthermore, the relative stability from fixed income could counterbalance the volatility in their prices.  

In sum, both asset classes combined could provide the revenue stream and capital gain potential, as well as standing together as a hedge against inflation. This would be ideal for ‘steady as she goes’ investors. The progressive wealth creation prospect could mirror that offered by Real Estate assets. This is certainly food for investor thought…