Inflation-Fighting Funds Come to Fore as Bernanke Defends Fed Policy

Hartford Municipal Real Return Fund (HTNAX), ING Floating Rate Fund (IFRAX) offer inflation protection

Inflation fears stoked by government spending and congressional Republicans’ questioning of Fed policy have investors seeking inflation-adjusted returns, and this trend has some companies offering new or repackaged funds that offer a safe harbor from the rising interest rates that accompany inflation.

Two such inflation-fighting funds that have recently launched or been repackaged are:

On Wednesday, members of Congress sharply questioned Federal Reserve Chairman Ben Bernanke over whether the Fed's policies are raising the risk of rising inflation in the months ahead. The new House Budget Committee Chairman Paul Ryan, R-Wis., said he was concerned that the Fed won't be able to detect inflation until "the cow is out of the barn" and inflation is already spreading dangerously through the economy.

Bernanke said inflation in the United States remains "quite low,” though he acknowledged that inflation is surging in emerging economies. But he downplayed the risks to the U.S. economy, even as lawmakers expressed concerns about rising prices for gasoline and food.

The Hartford Municipal Real Return Fund, sub-advised by Hartford Investment Management, will continue to seek income exempt from federal income tax, but will now also seek real return, or after-tax inflation-adjusted returns.

The fund intends to invest in inflation-linked derivatives and securities to hedge the sensitivity of the municipal bond portfolio against changes in inflation and inflation expectations.

“We are enhancing the fund’s investment strategy to broaden its market appeal and help grow assets,” said Jim Davey, president of The Hartford Mutual Funds, in a statement. “Alongside our Global Real Asset and Inflation Plus funds, Municipal Real Return is another way for financial advisors to address their clients’ inflation concerns and still give them access to tax-free investing.”

In a white paper on growth and inflation published this month, Hartford Investment Management calls the economic landscape “littered with challenges,” and expressed a concern that the current 3% to 3.5% growth rates are unsustainable.

“Traditionally, we think of lower growth rates as supportive of fixed income securities. In reality, however, we believe it is the low inflation rate that corresponds to the low growth rate that is supportive of fixed income securities. Today’s environment is atypical; we expect higher inflation will push bond yields higher, regardless of the lower growth, and we think investor portfolios are ill prepared for this rise," the white paper warns.

ING Investment Management, meanwhile, manages more than $10 billion of floating rate securities including the recently launched ING Floating Rate Fund. The fund invests in ultra-short duration floating rate loans that reset every 30, 60 or 90 days, making the fund less affected by rising interest rates than other fixed income funds.

Bill Gross, who manages the world’s biggest bond fund at Pacific Investment Management Co. (PIMCO), in January recommended investors should buy floating-rate notes to protect against a possible rise in rates, according to Bloomberg.

Read more about PIMCO’s Bill Gross at AdvisorOne.com.

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