Consultants at Rocaton Investment Advisors LLC, Norwalk, Conn., recommend that clients invest in a basket of different inflation-hedging strategies because different strategies work better in different economic environments. The time horizon also affects performance of various inflation-hedging strategies, Rocaton officials noted in a client paper.
For example, commodities perform best when inflation is rising, while TIPS perform best when inflation is falling. In addition, some asset classes perform better when inflation is either high or low.
"Our objective is to help clients establish portfolios that will do well in all different types of macroeconomic environments," said Meriam Zandi, senior consultant at Rocaton and one of the paper's co-authors.
In the paper, Rocaton officials looked at the effect of including an inflation-protection allocation in a typical corporate pension plan. A 20% inflation basket modestly improves sensitivity to inflation, boosting the correlation to 0.06% from -0.08%. Also, the total fund's Sharpe ratio — a measure of portfolio efficiency — increases to 0.59 from 0.53, the paper said.
While the size of allocations will hinge on each client's needs, a focus on TIPS, real estate and commodities should probably total between 5% and 10% of the total fund, Ms. Zandi said.
Surging interest in the inflation-protected asset classes have led to rapid growth in assets under management for some firms.
Pacific Investment Management Co. LLC, Newport Beach, Calif., runs more than $50 billion in real return strategies, up from less than $5 billion in March 2002, said Robert Greer, manager of real return products.
Of that total, PIMCO invests more than $28 billion in inflation-linked bonds, $12 billion in commodity index-tracking strategies, $9 billion in the All Asset Fund, which is subadvised by Research Affiliates LLC, Pasadena, Calif., and a few hundred million dollars in a real estate real-return strategy.
Institutional investors have always recognized inflation threats in their portfolios, but that awareness is "becoming more explicit," said Mr. Greer.
For Wake Forest's Mr. Morrell, his awareness stemmed from a painful experience. During a five-mile run last year near Half Moon Bay, Calif., Mr. Morrell took a short cut and tripped on tree roots in the approaching dusk. He fell, tearing a rotator cuff and damaging leg muscles. While laid up, he read "The Oil Factor: How Oil Controls the Economy and Your Financial Future," a book by Donna and Stephen Leeb that warns about the dangers of U.S. dependence on foreign oil.
As a result, Mr. Morrell started buying oil stocks for his own account. He later shifted assets in a Fidelity Tactical Fund — a fund of Fidelity funds over which he has discretion — into energy stocks. The accident "made millions for us," he said.