Real assets have long been regarded as a source of inflation protection and portfolio stability — but their behaviour when monetary policy shifts significantly is more nuanced than that reputation suggests, and Toby Watson brings to this subject a perspective built on extensive experience across hard asset lending and structured finance.
Real assets — encompassing property, infrastructure, commodities and other tangible investments — occupy a distinctive place in long-term portfolio construction. Their appeal rests on physical substance, income generation and a historical tendency to preserve value during inflationary periods. Yet when monetary policy shifts sharply, as it did from 2022 onwards, their behaviour becomes considerably more complex. Toby Watson, whose career spans hard asset lending, structured credit and global investment management across multiple rate cycles, offers a considered perspective on how real asset dynamics change when the monetary policy environment changes with them.
Few areas of the investment landscape illustrate the importance of monetary policy context more clearly than real assets. The same characteristics that make property, infrastructure and commodities attractive in one rate environment can become sources of vulnerability in another — and the transition between environments can be rapid. The perspective that Toby Watson brings to this subject is shaped by nearly 17 years at Goldman Sachs working across hard asset lending, principal funding and structured finance, followed by his role as a partner at Rampart Capital from 2020. That background gives him a practical grounding in how real assets behave across different monetary regimes — and what investors need to understand when those regimes change.
Rethinking Real Assets: Beyond the Inflation Hedge Narrative
The most common case made for real assets centres on their inflation-hedging characteristics — physical assets with genuine scarcity value tend to maintain real value during inflationary periods. This argument has genuine empirical support over long-time horizons and remains a meaningful part of the case for including real assets in a diversified portfolio.
The complication arises when inflation is accompanied by aggressive monetary policy tightening. In that environment, the inflation-hedging logic and the interest rate sensitivity of real assets pull in opposite directions. Rising interest rates increase discount rates applied to future cash flows, compress valuation multiples and raise financing costs for leveraged real asset investments. For Toby Watson, the net effect on valuations depends on which force dominates — and that depends on the specific asset, the degree of leverage involved and the speed of the rate increase. Toby Watson would stress that this tension is not a theoretical concern — it played out with real consequences for many real asset portfolios during the 2022 tightening cycle, reminding investors that the inflation hedge narrative is incomplete without an understanding of how rate sensitivity interacts with it.
How Does Interest Rate Sensitivity Vary Across Real Asset Categories?
Interest rate sensitivity varies considerably across different real asset categories, and understanding those differences are essential for thinking clearly about how a real asset allocation will behave when monetary policy shifts. Toby Watson, whose experience at Goldman Sachs included extensive work in hard asset lending across infrastructure, property and other tangible collateral, brings a practical understanding of how different categories respond to rate changes. For Toby Watson, the starting point is always the cash flow profile of the specific asset — its duration, its contractual inflation linkage and the degree to which its valuation is sensitive to changes in discount rates. Those distinctions matter enormously when monetary conditions shift quickly.
Property Markets and the Rate Transmission Mechanism
Property is perhaps the real asset category most directly affected by changes in monetary policy. Property valuations are heavily influenced by discount rates applied to future rental income — meaning rising rates compress values directly. Property is also frequently acquired using leverage, meaning rising financing costs affect returns both directly and through their effect on transaction activity and broader market sentiment. For Toby Watson, the interaction between valuation compression and leverage costs is one of the more important dynamics to understand when assessing how a property allocation will behave during a period of monetary tightening.
Among the practical implications for investors in property when rates rise are:
- The compression of valuation multiples even when rental income remains stable — a dynamic that can produce capital losses in leveraged property portfolios despite sound underlying fundamentals
- The reduction in transaction volumes that typically accompanies rate rises, which can affect liquidity and the ability to reposition within property allocations at reasonable prices
Toby Watson would note that these effects tend to be most acute in markets where leverage has been most extensively used during the preceding period of low rates — and that understanding the leverage profile of a property allocation is therefore an important part of assessing its rate sensitivity.
Toby Watson on Infrastructure and Commodity Dynamics
Infrastructure assets — particularly those with long-term, inflation-linked revenue contracts — tend to display a more resilient profile when monetary policy tightens. The contractual inflation linkage in many infrastructure assets provides a genuine hedge against rising prices. The long duration of infrastructure cash flows, however, means that rising discount rates can still affect valuations, particularly for assets that trade in secondary markets where prices are marked more frequently. For Toby Watson, infrastructure represents one of the more genuinely distinctive real asset categories — but the specific contractual terms of each asset matter enormously in determining how it behaves when rates rise.
Commodities occupy a different position entirely. They generate no income and their dynamics are driven by a complex interaction of supply, demand, geopolitical factors and currency movements. The relationship between commodities and inflation is real but uneven. For Toby Watson, whose background at Goldman Sachs encompassed exposure to commodity-linked financing, treating commodities as a simple inflation hedge understates the complexity of their behaviour across different macro environments.
Among the considerations most relevant for investors thinking about commodities when monetary policy shifts are:
- The specific driver of any inflationary episode — supply-side inflation tends to support energy and resource commodity prices more reliably than demand-driven inflation dampened by rate increases
- Currency effects — since most commodities are priced in US dollars, currency movements can significantly affect returns for investors operating in other currencies
Building Real Asset Allocations That Are Resilient Across Rate Regimes
Real assets are not a monolithic category — they are a diverse set of instruments with different cash flow profiles, leverage characteristics and rate sensitivities. Building a real asset allocation that is genuinely resilient across monetary policy shifts requires understanding those differences explicitly, rather than treating real assets as a single, undifferentiated block within a portfolio.
For Toby Watson, that understanding begins with a clear-eyed assessment of each asset’s rate sensitivity — and a realistic view of how the inflation-hedging characteristics investors value in real assets interact with the rate dynamics that monetary policy shifts invariably bring. Toby Watson would frame it simply: the monetary policy environment does not change what real assets are — but it changes, sometimes significantly, what they are worth and how they behave within a portfolio. Keeping that distinction clear is one of the more important disciplines in managing real asset allocations over the long term.
