energy weighting and therefore
has an inflation hedge
in the overall exposure.
Some people get exposure
to commodities through
owning companies like
Shell etc. The problem with
that is they are somewhat
diversified but are also getting
a lot of equity exposure
so their correlation
with other equity holdings
is going to be higher than if
they went with a basket of
commodity futures.”
Another issue with commodities
is just how much
of any inflation-linked rise
has already been priced in
for those looking to invest
today. The futures curves
for various commodities
are upward sloping so
some gradual price increase
has already been factored
in and commodity indices
are already behind the
curve when compared to
other investments.
“If you look at the
returns in 2009, the great
rebound that happened
from the end of February
throughout the year saw
the S&P up something like
30%,” according to Brad
Yim, a portfolio manager at
Castlestone Management,
“emerging markets up
maybe 80%, high yield corporate
bonds up 30%. The
commodity index was up
something like 22%, so it is
lagging far behind other
indices.”
He admits that commodities
are now the cheapest
asset, and that it does seem
to offer much better inflation-protection
when inflation
picks up versus other
asset classes, before adding:
“However, pretty much
anything except fixed
income does go up in inflation
because there is money
chasing goods.
“Oil and copper are
straightforward inflation
hedges as are a couple of
essential agriculture goods,
such as corn and soya
beans. For retail investors it
is easy to get hold of oil,
however the other major
commodities of copper,
soya beans and corn are
fairly hard to get exposure
to, even through ETFs and
oil ETFs. If they are not
actively managed ETFs you
tend to lose a lot of the
returns due to the upward
sloping futures curve. In
2009 it depended whether
commodity funds were
actively or passively managed.
We would recommend
intelligently managed
commodity index futures.”
l Property comeback
Lastly there is property, an
asset that has appeared on
professional investors’
radars for the past six
months or so, about as
long as they have started to
worry about inflation.
Aegon’s Wise adds: “The
general comeback in the
real estate market is for
much more simplistic reasons.
The market was
probably a bit oversold,
but confidence is now
starting to come back. It
has an attractive income
yield relative to other
assets, particularly gilts, so
the income is fairly certain
and secured on some quite
long leases.”
He is also of the opinion
that property’s improvement
is set to continue, but
not quite to the extent that
it has in the past until the
occupational market and
the wider economy start to
catch up.
It almost goes without
saying that bricks and
mortar property funds are
the better inflation hedge
than their equity counterparts,
although investors
may struggle to find property
funds that do not have
a legacy portfolio of buildings
with covenants that are
SPECIAL REPORT REAL ASSETS AS INFLATION HEDGE
Prprty & real estate fund p’mance – 1 year
40
30
20
10
%
0
-10
-20
-30
Feb ’09 May
Source: Morningstar
Asia Pacific ex Japan
not in their favour.
So what are the wealth
managers actually buying
to protect their clients’ portfolios
against the ravages of
future inflation?
Lee Robertson, chief
executive of Investment
Quorum, steers clear of real
assets and prefers collectives,
looking at indexlinked
bonds, corporate
bonds – “though they have
probably come off the boil
a bit now” – and positioning
clients with an income
stream to counter any CPI
or asset price inflation.
l Income and inflation
Income and how it interacts
with inflation is another
important consideration.
A long-duration asset with
no income stream will take
a hit to its capital from
inflation over time, but any
income will bring forward
the cash flow and protect
the investment in the interim.
If the income is not
needed then it can always
be reinvested at the lower
price, suggests Hudson.
Anna Sofat, founder of
Addidi, uses index-linked
gilts and high yield bonds
because there is an equity
play on them as well, with
equities also acting as a
good hedge against inflation.
Her property exposure
is in bricks and mortar
property funds, preferring
those that do not borrow
unless she is investing on
behalf of a particularly high
risk client. The property
funds she invests in are
from Ignis, M&G (for slightly
more cautious investors)
and Aviva.
“We put commodities
under our alternatives
banner so we are not necessarily
investing in them
to specifically hedge
against inflation, but for
diversification. We have
the World Mining Trust
and the Gold and General
Fund from BlackRock, and
for people with higher risk
portfolios we look at ETFs.
It depends on the portfolio
size, but we have done
some investment into agriculture
and infrastructure
under this same banner,”
she explains.
So while many have
inflation on their radar, with
different types of investment
businesses expecting
it to reappear but not for a
few years, there is little that
portfolio managers are
doing differently today to
reflect this on behalf of
their clients.
If anything, it is asset
price inflation that they are
looking to take advantage
of, rather than consumer or
retail price inflation they
are looking to protect
against.
MARCH 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
Global
Aug
MSCI World UK
North America
Nov
Feb ’10
“
We put
commodities under
our alternatives
banner so we are
not necessarily
investing in them to
specifically hedge
against inflation, but
for diversification
”
Anna Sofat, founder, Addidi
27
To view a Ceros magazine you need to have JavaScript enabled in your browser and have the flash player 8 or higher installed. To install the latest flash player, click the icon above, install the flash plugin and then click here to refresh this page.