Michael Underhill, chief investment officer of Milwaukee-based Capital Innovations, argued Tuesday at IMCA’s annual conference in Seattle for more real assets in the investment portfolio. The reason, as one might expect, was to combat the effects of inflation.
“Even low to moderate inflation can dramatically impact participants’ purchasing power over time,” Underhill said. “For example, a 2% annual inflation means that a dollar today will only have the purchasing power of 55 cents 30 years from now.”
He added that defined contribution plan investors must manage a real liability—their own expenses in retirement.
“The objective of a defined contribution plan is to generate cash flow in retirement. If the inflation-adjusted value of a plan participant’s savings falls significantly; they have to make some hard choices around how to reduce their levels of spending.”
In order to protect retirees from significant erosion in purchasing power, it is useful to include investments that mitigate the impact of inflation. Hence, his call to include real assets.
“Unexpected inflation is a change in prices that differs from the consensus view of what inflation is expected to be,” Underhill explained. “When we talk about inflation risk, we are commonly talking about unexpected inflation.”