A client in her 40s is concerned about potential inflation and wants to invest $100,000 (10 percent of her total investment portfolio) in mutual funds that will provide a hedge against inflation. She is willing to invest for five years or longer and is comfortable with market volatility.
What research tools do you use to identify prospective funds for clients?
We have a number of things. We have things as simple as using Morningstar Principia Pro, which gives a lot of great beginning analysis for us on mutual funds. We use the Bloomberg Terminal to really go many steps further in that analysis.
Before we actually use the funds, we take it another step further and actually go over the data with the managers themselves and make some decisions.
What specific fund categories would you recommend for this scenario, and why?
There would be a couple of things to look at. The one you would probably hear the most from everybody would be TIPs. That would be one piece certainly that should be part of the equation in this case, but I don’t think it should be the only piece.
I think it’s important to have some allocation to commodities, because it has served at least to a degree at different points as an inflation hedge as well. The client’s willing to accept volatility, and that’s obviously a very volatile asset class, although you can mute it within a portfolio as far as tempering that commodity exposure in terms of its volatility.
Another thing to consider would be something like bank loan funds. Commercial loans have a floating interest rate attached to them, so if we have inflationary concerns, interest rates will rise to temper that, generally speaking, which would bode well for that one asset class by itself, because you would win as the investor when interest rates rise.
What specific funds and allocations would you recommend within those categories?
On the floating rate side is Eaton Vance Floating-rate fund (EIBLX), probably about a 3% to 4% weighting (of the 10% being allocated). Looking at the TIPS, one we have been using to the get the exposure is the Pimco Real Return Fund (PRRIX).
(For commodities), we’ve been using the iPath Dow Jones-UBS Commodity Index Total Return ETN (DJP). It’s actually an ETN but it’s getting you very broad-based exposure like a mutual fund can. It has a whole basket of different types of commodities you’re investing into, whether it’s grains, to some degree energy. It’s very diversified in that respect.