PLANSPONSOR - October/November 2019 - 46

INVESTMENT FOCUS
for younger people the risks can manage
themselves. Vincent Cocula, Fiona Sloof
and Matthew O'Hara, all researchers at
BlackRock in New York City, studied inflation
for workers in different age groups over
the 1970s through 1990s, and found that
nearly all age cohorts saw their incomes
outpace inflation in each decade. They also
posit that, for large portions of younger
workers' careers, most of their savings will
be invested in equities and that, over the
long run, stocks' returns also beat inflation.
Thus, an explicit investment linked
to inflation too far before retirement might
be overly conservative.
Economists recognize two sorts of
inflation: expected inflation, which is
built into a given economic environment,
and unexpected inflation, arising from
sudden shocks such as the oil crises of
the 1970s and 1980s.
Researchers at Northern Trust Asset
Management, Chicago, have studied
inflation investing, too, using the last
20 years or so as a laboratory. " Expected
inflation tends to be priced into financial
markets, but what remains a risk is unexpected
inflation, especially for the bond
portion of the portfolio, " explains Susan
Czochara, head of the firm's retirement
solutions group.
Consultants at Callan have expanded
their classic " Periodic Table of Investment
Returns " analyses to include inflation
comparisons. From 2009 through
2018-a short interval in terms of
inflation history-several asset classes
frequently outperformed inflation by far,
including real estate investment trust
(REIT) funds, high-yield bonds, and largeand
small-capitalization U.S. equities.
One investment specifically designed
for inflation is Treasury inflation-protected
securities (TIPS), which are U.S. Treasury
bonds whose principal adjusts for inflation.
But they typically return little more.
Moreover, " We hear some asset
managers say that the academic argument
for TIPS is sound, but [those bonds]
have been around only since 1997 and
haven't gone through high inflation, so
U.S. Stocks and Bonds in High Inflation
Quarterly data from December 1975 - December 1983
300
S&P
500
250
Consumer Price
Index
Bloomberg Barclays U.S.
Aggregate Bond Index
200
150
100
1975
1976
1977
Rebased to 100 at December 1975
Source: eVestment
diversifying a fund to a group of assets
with different inflation sensitivities is
important, " says Bobby Blue, an inflation
specialist in the multi-asset alternatives
group at research and investment firm
Morningstar in Chicago.
For retirees and soon-to-be retirees,
who should have some inflation protection,
what is the best way to go about getting it?
Says Czochara, whose firm includes inflation
sleeves in its asset-allocation funds,
" Over the last 20 years, there really hasn't
been any unexpected inflation, and we
can't be sure what assets will work best, so
we use a combination of TIPS and equities.
" One area that we find performs well
in higher inflation is equities of natural
resource producers, " she notes. " They
generate TIPS-like returns in normal
inflation, but in a high-inflationary environment
they can have strong returns,
along with those of global real estate and
global infrastructure investments. "
" We wanted to look beyond traditional
inflation-sensitive assets, such
as TIPS, REITs and commodities, " says
Jessica Bush, portfolio manager for the
Diversified Real Asset strategy offered by
Principal Global Investors, in Des Moines.
" We include asset classes that have been
sensitive to inflation, but temper them
46 PLANSPONSOR.com October - November 2019
with others correlated with inflation but
with lower-risk profiles. Natural resource
equities, commodities, global infrastructure
and global REITs provide the higher
inflation sensitivity and standard deviation.
The lower-octane assets would be
TIPS, floating-rate debt and some currencies.
Balancing the exposures makes it a
more livable investment when inflation
isn't the primary driver of returns. "
Inflation-targeting products make
up a small part of the retirement investment
landscape, says Blue. " Many of those
funds have performed poorly in the last 10
years of practically nonexistent inflation.
Whether it's the performance, or investors
making projections of low future inflation
is hard to say, but [the funds'] assets have
been in decline for the last three years. "
Indeed, Vanguard Group's 2019 How
America Saves survey reports that just
4% of participants who had been offered
inflation-targeted funds took them up.
The funds are not a sometime thing,
Blue advises. " If investors are concerned
about inflation, those investments are
something they need to hold onto. These
funds are designed to protect against inflation
spikes, and once you see a 6% jump in
commodities prices, you can't get the same
benefits. " -John Keefe
1978
1979
1980
1981
1982
1983
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