A diversified real return portfolio can be an important component to investor portfolios, given the potential long-term threat of inflation. Inflation erodes purchasing power cumulatively and exponentially by increasing the cost of future spending. While many asset classes perform poorly in an inflationary environment, a portfolio of real assets provides a hedge for inflation-driven liabilities and protects against losses in rising or high inflation scenarios. Defined benefit (DB), endowment, foundation, defined contribution (DC) and individual investors are exposed to substantially different types of inflation risk. This infographic takes a closer look at real return strategies. It depicts risk levels, product availability and the configuration of each real asset strategy. The three pie charts shown here represent examples of real return structures that are appropriate for diversified portfolios. The size of the real asset allocation and the types of strategies employed will depend on the unique circumstances of each investor. The portfolios can be further customized to achieve more conservative allocations that are fixed income heavy (e.g., by adding more TIPS) and for more aggressive, equity-heavy portfolios (e.g., by adding private investments). A wide variety of asset classes are used in real return portfolios displaying a range of public and private equity and fixed income-like characteristics. On the reverse side we offer greater detail on the benefits, risks, investable universes and benchmarks that accompany each real asset class.

1. TOTAL PORTFOLIO SIZE
A diversified real return portfolio can be an
important component to investor portfo-
lios, given the potential long-term threat of
inflation. Inflation erodes purchasing
power cumulatively and exponentially by
increasing the cost of future spending.
While many asset classes perform poorly
in an inflationary environment, a portfolio
of real assets provides a hedge for infla-
tion-driven liabilities and protects against
losses in rising or high inflation scenarios.
Defined benefit (DB), endowment, founda-
tion, defined contribution (DC) and individ-
ual investors are exposed to substantially
different types of inflation risk.
This charticle takes a closer look at real re-
turn strategies. It depicts risk levels, prod-
uct availability and the configuration of
each real asset strategy. The three pie
charts shown here represent examples of
real return structures that are appropriate
for diversified portfolios. The size of the
real asset allocation and the types of
strategies employed will depend on the
unique circumstances of each investor.
The portfolios can be further customized
to achieve more conservative allocations
that are fixed income heavy (e.g., by
adding more TIPS) and for more aggres-
sive, equity-heavy portfolios (e.g., by
adding private investments).
A wide variety of asset classes are used in
real return portfolios displaying a range of
public and private equity and fixed
income-like characteristics. On the reverse
side we offer greater detail on the benefits,
risks, investable universes and bench-
marks that accompany each real asset
class.
Real RetuRn StRategieS: a CloSeR look
 Customization required as no multi-asset real return product that
includes private real estate exists. Private real estate can be accessed
via separate accounts or commingled funds.
 Individual asset class exposure is available for all assets, although
mutual fund exposure to commodities is difficult due to taxes on
commodity income.
 Eight multi-asset real return strategies for DB real return mandates of
$1 million or greater, mostly in mutual fund vehicles. Six of these
strategies are available to DC plans.
 Twelve multi-asset real return strategies in commingled or mutual funds
for real return mandates of $5 million or greater.
 Exchange-traded funds (ETFs) are available in each asset class to
construct more customized portfolios.
 For real return mandates of $500 million or greater; customization
through individual asset class exposure is required.
 Separate accounts are available, which can be customized to broaden or
limit exposures. Potential use of closed-end vehicles with longer lock-up
periods for capital. Open-end funds with some liquidity exist for private
real estate, agriculture and infrastructure.
 Private energy, infrastructure, agriculture and timberland have more
limited availability due to a smaller universe of managers. Can substitute
infrastructure, timberland and agriculture if more exposure to one of the
asset classes is desired.
Callan Associates • Knowledge for Investors
MEDIUM PLANS ($100 million to $3 billion in plan assets)
• Multi-asset class real return fund or individual asset class exposure
through pooled funds.
• Private real estate represents the core of the portfolio, 65% to 75%
of total. REITs can comprise up to 20% of the real estate allocation for
liquidity and rebalancing.
• TIPS and commodities provide liquidity for portfolio rebalancing
to capture volatility premium.
SMALL PLANS (under $100 million in plan assets)
• Multi-asset class real return fund or stand-alone Treasury Inflation-
Protected Securities (TIPS) allocation.
• 50% TIPS allocation keeps portfolio liquid and less volatile.
LARGE PLANS (over $3 billion in plan assets)
• Multi-asset class real return fund or customized portfolios to access
individual asset class exposure.
• Provides greater diversification with the introduction
of a larger potential opportunity set—requires scale, additional
monitoring and a longer time frame due to limited liquidity
with real estate, infrastructure, agriculture,
timberland and private energy.
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Private Real Estate
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Commodities
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
TIPS
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Timberland
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Agriculture
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Infrastructure
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Private Energy
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
REITs
Expected Return
Expected Risk
Correlation with CPI
Short-Term Inflation Hedge
Long-Term Inflation Hedge
Liquidity
Availability of Product
Fees and Expenses
cash equity
cash equity
low high
poor excellent
poor excellent
low high
poor excellent
poor excellent
Natural Resource Equities
REITs
Timberland
Agriculture
Infrastructure
Private Energy
Commodities
Private Real Estate
Private Real Estate
Commodities
Higher Liquidity Higher Complexity
TIPS TIPS
TIPS
Commodities
Natural
Resource
Equities
REITs REITs
PRODUCT AVAILABILITY

2. Further Reading
About Callan
Beyond U.S. Timberland
(2010)
Publicly Traded Privately Traded
For further reading, Callan recommends
the following research pieces:
Founded in 1973, Callan Associates Inc. is one of the largest
independently owned investment consulting firms in the country.
Headquartered in San Francisco, Calif., the firm provides research,
education, decision support and advice to a broad array of
institutional investors.
www.callan.com © 2011 Callan Associates Inc.
Published January 2011
Is it Time to Add TIPS
to Your DC Plan? (2010)
Global Real Estate Securities:
An Introduction for the
Institutional Investor (2007)
Real RetuRn StRategieS: a CloSeR look
Callan Associates • Knowledge for Investors
Timberland is a compelling real asset strategy that is attracting investment due to
its income generation potential and diversification benefits.
Historically, the majority of institutional investors have focused on U.S. timberland,
which represents the largest share of the global marketplace. International
timberland investment opportunities are increasingly becoming available.
International timberland presents unique opportunities and challenges. Investing
abroad diversifies domestic exposure and provides access to an emerging
opportunity set and attractive pricing. However, investors face country and
environmental risks, scanty return data for benchmarking, implementation
challenges and a limited manager universe with little quantifiable performance
history.
In this paper Callan explores global timberland investments, which offer
opportunities for investors looking beyond the more mature U.S. timberland market.
*"! $ !
Investors seeking inflation protection and portfolio diversification are shifting focus to real asset
strategies and due diligence is increasingly trained on investments that represent finite
resources. Timberland is a compelling investment strategy due to a variety of unique character-
istics, including its biological growth component, income generation potential and diversification
benefits. The majority of institutional investment in timberland has been within the U.S., which
represents the largest share of the global timberland marketplace. However, the investment
industry has begun to explore opportunities in the vast timberland areas outside of the U.S.
In this paper we explore global timberland investments, including the investment manager uni-
verse, opportunity set and the fundamental benefits and risks of looking beyond the U.S. We
describe common challenges in benchmarking and obtaining historical performance, and exam-
ine implementation options.
!&$" ' & "!
Callan Associates • Knowledge for Investors
Is it Time to Add TIPS
to Your DC Plan?
Due to 2008 and 2009 monetary and fiscal stimulation, the possibility of higher
inflation in the future has motivated some plan sponsors to pursue offsetting
diversification options, such as Treasury Inflation-Protected Securities (TIPS).
TIPS may be a good fit for defined contribution (DC) plans seeking additional fixed
income inflation-protection options.
Plan sponsors adding TIPS to their DC fund lineup must be willing to assume the
challenge of communicating this investment thoroughly and appropriately to plan
participants.
This paper addresses how to offer TIPS in a DC plan—as part of a core fixed
income fund, within target date funds, as an available option in a self-directed
brokerage account or as a stand-alone fixed income fund—for optimal participant
utilization.
As the market and economy show signs of recovery, plan sponsors are taking a closer
look at their defined contribution plan fund lineup. They are asking questions like: Does
it allow for sound diversification? Does it meet the demographic needs of plan partici-
pants? Can it weather the next storm—whatever that might be? In particular, Treasury
Inflation-Protected Securities (TIPS) is an asset class that bears closer scrutiny, both for
its diversification potential and for its inflation-protection properties.
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Callan Associates • Knowledge for Investors
Contact Information
For more information please contact your Callan consultant.
San Francisco
415.974.5060
Atlanta
770.618.2140
Chicago
312.346.3536
Denver
303.861.1900
New Jersey
973.593.8050
Agriculture
Agriculture investments are in properties that are leased to farmers and
used to grow crops. Sources of return include a high income component from leasing
fees. Agriculture provides an indirect inflation hedge from two sources: an inflation-
sensitive income stream and exposure to the underlying spot prices of commodities.
Benefits
• Solid long-term inflation hedge; capital appreciation from income producing
investments.
• High current income, low observed volatility. Should outperform stocks and will trump
bonds in periods of rapidly rising or high inflation.
Risks
• Long-term, illiquid investment with very thin supply of institutional-quality products.
• High transaction costs and valuation and monitoring challenges; can suffer from
imbalances in supply and demand.
• Unique operational risks (e.g., commodity prices, pests, disease, regulation).
Investable Universe
• $900 million (investable U.S. agriculture), representing 1% of total U.S. agriculture.
Often difficult to find farms of a large enough value for institutional investments. Less
than 20 institutional managers accessed via separate accounts or commingled
funds.
Benchmark: NCREIF Farmland Index (investable U.S. universe)
Commodities
The commodities market trades 96 different commodities. Institutional investors typically
invest in futures contracts because of the difficulties of owning physical commodities. For
futures, the sources of return include spot prices, roll returns and the interest on
underlying collateral. Commodities provide a direct hedge to inflation since spot
commodity prices can be a major driver of inflation.
Benefits
• Good potential candidate for active management.
• Strong complement to TIPS exposure in a real return portfolio; low to negative
correlation to stocks and bonds.
• Rise in price with inflation providing a natural hedge against equity and debt losses.
Risks
• Highly volatile with a steep downside and should be actively rebalanced with
uncorrelated assets.
Investable Universe
• $300 trillion (commodities derivatives market); 50 active and passive institutional
commodities strategies, accessed publicly.
Benchmarks: Goldman Sachs Commodity Index;
Dow Jones-UBS Commodity Index
Infrastructure
Investments in infrastructure are in facilities that provide essential public
services (e.g., transport, utilities, communications, social services). Infrastructure’s main
source of return is income generated from toll payments or underlying fees (e.g.,
leases). Inflation protection stems from the inflation-sensitive income stream and the
replacement costs of the underlying physical asset.
Benefits
• Stable income stream providing a long-term inflation hedge.
• Provides high current income and low observed volatility. May outperform stocks and
bonds in periods of rapidly rising or sustained high inflation.
Risks
• Returns are bond like—impacted by interest rates and credit market conditions.
• Long-term, illiquid investment with thin supply of institutional-quality products. Political
and regulatory risks as well as public controversies over privatization.
• Fees based on committed, not invested, capital therefore performance and fee
calculations are usually estimates.
Investable Universe
• $1 trillion (global universe) with 120 managers worldwide; U.S. and Europe comprise
40% of the total. MLP markets are small but growing.
Benchmarks: S&P Global Infrastructure Index;
Alerian MLP Index (MLP)
Natural Resource Equities
Natural resource equities are the equity securities of commodity producers, generating
returns from two sources: dividend income and capital appreciation. Commodity producers
have an indirect hedge to inflation from exposure to the underlying spot commodities.
Benefits
• Solid correlation with inflation while having equity-like risk/reward characteristics.
• Highly liquid compared to non-exchange traded real return strategies.
• Eliminates the negative “roll return” often faced by commodity futures.
Risks
• More correlated at times with equity markets than direct commodity exposure.
Investable Universe
• Large universe through energy sector equities whose earnings are linked to commodity
prices, ETFs and hedge funds (e.g., CTAs, global macro).
Benchmarks: MSCI All Country World Commodity Producers Index;
S&P Global Natural Resources Index
Private Energy
Private energy investments are through acquisitions or equity stakes in energy
companies, or through direct ownership of properties or energy projects. Private energy's
inflation-sensitive income stream provides an indirect inflation hedge from the sale of
resources at market rates and from valuation changes as the resource price fluctuates.
Benefits
• Income is often linked to inflation, providing a solid long-term inflation hedge,
particularly from rising commodity prices.
• Outperforms stocks and bonds in periods of rapidly rising or sustained high inflation.
• Less volatile than commodities, adds value over the long term, provides diversification.
Risks
• Long-term, illiquid investment with thin supply of institutional-quality products.
• Potential for periods of underperformance relative to stocks and bonds, given long
commodity cycles.
Investable Universe
• Limited universe of approximately 40 managers, employing energy sector investment
strategies including oil and gas, power and alternative energy (e.g., wind, solar,
geothermal, etc.).
Benchmarks: Dow Jones Energy Sector Index; S&P 500 Energy Index
Private Real Estate
Private real estate is a direct approach to owning commercial real estate
properties. Sources of return for core private real estate include rental
income and capital appreciation. Similar to infrastructure, real estate can have an
inflation-sensitive income stream, as well as inflation protection via replacements costs
of the underlying physical asset.
Benefits
• Solid long-term inflation hedge, with a high level of short-term correlation to inflation.
• Core strategies provide high current income, a relatively high rate of return and low
observed volatility. Should outperform stocks, and will certainly trump bonds, in
periods of rapidly rising or high inflation.
Risks
• Illiquid; significant declines in early 1990s and 2009 not related to inflation.
Investable Universe
• $6 trillion (institutional private investment). 36% of the commercial market is
located in the U.S. and 35% in Europe.
Benchmark: NCREIF Property Index
REITs
REITs are publicly traded real estate securities that provide liquidity not
found in private real estate. Similar to natural resource equities, returns stem from
dividend income and capital appreciation. Inflation-sensitivity is derived from the
characteristics of the underlying private real estate assets.
Benefits
• Provide access to diversified real estate assets not found in other vehicles.
• Solid long-term inflation hedge; outperform bonds in periods of rapidly rising or
sustained high inflation.
• Liquidity enables REITs to replace private real estate in smaller portfolios. REITs
complement private real estate in larger portfolios with liquidity and exposure to
specific market segments, such as regional malls and CBD offices.
Risks
• Sensitive to interest rates and management.
• Highly correlated to small and mid cap equities; highly volatile.
Investable Universe
• 192 institutional-quality global real estate securities, totaling $555 billion; 126
institutional-quality U.S. real estate securities, totaling $359 billion, as well as a limited
number of out-of-benchmark securities.
Benchmarks: FTSE NAREIT Equity Index (domestic institutional-quality);
FTSE EPRA/NAREIT Developed REITs Index (global institutional-quality)
Timberland
Timberland displays characteristics of more than one asset class with
attributes of real estate, fixed income and commodities. It derives its revenue
from its biological growth value, land prices and the price of timber. It is difficult to
implement in a DC framework because of the daily valuation requirement.
Benefits
• Solid long-term inflation hedge, stemming from biological growth and income
generated by harvesting a commodity.
• High current income, low correlation with other assets, a relatively high rate of return
and low observed volatility. Should outperform stocks and will trump bonds in periods
of rapidly rising or high inflation.
Risks
• Limited transaction activity and history.
• Long-term, illiquid investment with thin supply of institutional-quality products.
• Unique operational risks (e.g., fire, pests, water shortage, disease, regulation).
Investable Universe
• $300 billion est. (total global timber), with the majority in the U.S. ($212 billion),
representing 1.5 billion hectares. About 25 institutional-quality investment managers
globally accessed via direct separate accounts or closed-end commingled funds.
Benchmark: NCREIF Timberland Index (limited availability of data)
TIPS
TIPS are notes and bonds issued by the U.S. Treasury as “inflation-linked”
debt. Inflation-indexed bonds are quoted in terms of a real yield. TIPS are
considered the purest hedge against CPI inflation as their principal and interest are
adjusted for actual or realized inflation.
Benefits
• Positive risk-free real return—if the embedded “real yield” is positive at purchase,
positive real return will result at maturity.
Risks
• Impacted by supply and demand pricing factors because of limited supply and
issuance. Can produce negative real returns over short periods.
• Low yields—many investment programs need a higher real return to meet return
assumptions.
Investable Universe
• $1.5 trillion (global inflation-linked bond market), of which $500 billion is outstanding
U.S. TIPS. 70 institutional U.S. TIPS strategies accessible to institutional investors and
over 20 global inflation-linked bond strategies.
Benchmarks: BC U.S. TIPS Index; BC Global Inflation-Linked Index