Inflation Fears Drive Investors to Hedge Portfolios: Clear Path

Institutional investors worry about price gains as oil and health care costs rise

Recent price increases have reminded U.S. and Canadian-based retirement plans of the threats posed by inflation and the need to develop inflation hedging plans quickly, according to an industry report from Clear Path Analysis. As a result, portfolios that use varied strategies such as infrastructure are growing as the market takes steps to safeguard investments.

Investment groups are concerned that the next 20 years will bring higher inflation and slower growth rates than the last two decades, say commentators from Cohen and Steers and BNP Paribas in the report.

Higher oil and health care prices, past dollar weakness and Asian export of rising prices to the West are all contributing to inflation, along with U.S. Department for Agriculture projections that 2012 will bring a food price spike of 2.5% to 3.5%, says the second annual Inflation Hedging for Institutional Investors in North America report from London-based Clear Path Analysis. The report brings together the thoughts of 20 U.S. and Canadian-based pension, endowment and asset management experts.

Yigal Jhirad, portfolio manager at real estate securities asset manager Cohen & Steers, warns of the global inflation threat: “Natural supply barriers and geopolitical issues are affecting commodities. Inflationary pressures exist and we have seen food, oil and gas prices rise. So our approach is to build a strategy that is well positioned to excel in periods of high inflation, but also offer an attractive risk-return profile over the long term.”

Hedging against inflation is tricky because the drivers of inflation are complex and could be monetary, cost or demand induced, Jhirad adds. “In order to try to target inflation as a whole, you really need to think about having a diverse mix of real assets that would be effective in providing purchasing power protection against multiple drivers of inflation.”

In another note for the report, senior U.S. economist Jeremy Lawson and interest rate strategist Aaron Kohli of BNP Paribas advise investors to explore both the risk of inflation and the possibility of a steady deflation. At the same time, they’re optimistic that the Federal Reserve will steer the course.

“Going forward, we expect the Fed will continue to get the policy mix right and a gradual decline in unemployment takes place without a break out in wage growth, while inflation expectations remain anchored close to 2%,” Lawson and Kohli write.

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