Public pension funds are adopting portfolio strategies now to protect them from the prospect of inflation down the road.
While nobody expects inflation to raise its ugly head in the short term, investors are crafting portfolios to hedge against it when it does reappear, consultants and investors say.
A few pension funds — such as the California public employees' and state teachers' retirement systems — have been adding inflation-protection allocations. Others, including Orange County, California, and Aurora, Colo., are adding allocations to asset classes expected to protect their portfolios against inflation.
There is some disagreement among investors about the inflation protection various asset classes provide — from plain, old stocks to inflation-linked bonds, oil and gas, commodities, infrastructure and real estate.
European pension funds have been the first adopters of inflation-linked strategies because the benefits those institutions pay usually are linked to inflation (Pensions & Investments, June 15). But lately, U.S. institutions have been jumping on the inflation-hedging bandwagon.
Last year, the $188.5 billion California Public Employees' Retirement System, Sacramento, became one of the first large U.S. institutions to adopt an inflation-hedging asset class. The $122.4 billion California State Teachers' Retirement System, Sacramento, is expected to do the same at its Aug. 12 meeting.
“We haven't dealt with inflation for 20 years but going forward it's not realistic, given the stimulus package, not to expect it to return,” Christopher J. Ailman, CalSTRS' chief investment officer, said in an interview. “We're looking for investments that have a higher relationship to inflation and are not correlated to stocks and bonds.”
So far, CalSTRS includes only inflation-linked bonds and infrastructure in its allocation. System officials expect to start building a global inflation-linked portfolio in the summer and fall. Next up, system officials plan to study commodities and liability-driven investing, Mr. Ailman said.
“In some circumstances, our (old) model did not grab absolute returns,” he said.