This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article is by Larry Whistler, president and chief investment officer of Buffalo, New York-based Nottingham Advisors.
As a general rule of thumb, the best time to buy insurance is typically before one actually needs it. Not only is it usually cheaper, it will be in place when something unanticipated occurs. The same is true regarding inflation protection.
While inflation hasn’t been something investors have had to worry about for quite some time, the huge central bank money printing experiment of the past seven years will likely instill some investors with anxiety about where interest rates can go from here.
Inflation protection strategies haven’t been gaining too much traction of late; however, we feel now might be a good time to consider them.
The long, slow decline in the level of inflation, and hence interest rates, over the past 30 years means few investors remember what a meaningful rise in the general price level can do to fixed-income portfolios. Only a handful of years over the past three decades have seen a backup in interest rates. Here in the U.S., the Federal Reserve hasn’t raised the federal funds rate in nearly 10 years. Moreover, policymakers today seem to profess greater concern over deflation rather than inflation.
All that said, it may not be a bad time to explore inflation-hedging strategies, especially for those investors with large fixed-income exposures.
A Multi-Asset Class Approach
At Nottingham Advisors, our Real Return Strategy was designed to offer a hedge for just such investors. The portfolio provides exposures to four distinct asset classes, all of which have demonstrated some inflation-fighting characteristics in the past.
The Real Return Strategy, as the graphic above makes clear, is a portfolio that maintains equal exposure to equities, commodities, fixed income and alternatives.