Portfolio Manager Perspectives

Jeff Benjamin

Manager plots strategy for the onset of inflation

Years of quantitative easing will have an effect; many prices already rising

Apr 18, 2013 @ 12:13 pm

By Jeff Benjamin

As Fed watchers and economists continue debating how inflation in the U.S. is to be calculated, it seems inevitable to many that more than four years of quantitative easing eventually will trigger some inflationary pain.

The reality of the Federal Reserve's buying $85 billion a month in Treasury bonds, laid over existing multibillion-dollar QE programs, is a large part of the momentum behind the rush to buy gold over the past few years.

This is the premise on which Michael Hanus, founder of North Peak Asset Management, has built an innovative new strategy, the Inflation Hedges Strategy Fund (INHIX).

The fund, launched a month ago, uses six subadvisers, including two hedge fund managers, to construct a multiasset portfolio designed to shine when inflation gets above the 2.5% level.

With inflation currently calculated by the consumer-price index at 1.5%, such a strategy might not seem like an urgent necessity, especially considering that the Fed's target inflation rate is 2%.

Mr. Hanus dismisses the CPI measurements as questionable and points to the growing support for chained CPI, which measures inflation based on consumers' evolving spending habits.

“If steak starts getting expensive, people will start buying more chicken,” he said.

Citing the price of everything from food to gasoline to energy, he added, “Inflation is already higher than most people realize.”

While the fund is structured to take advantage of higher inflation, it also is designed as a portfolio hedge that can generate income even when inflation is low, he said.

The portfolio is made up of four broad asset classes, Treasury inflation-protected securities, floating-rate bank loans, commodities and inflation-sensitive equities such as natural resource companies.

The TIPS allocation, managed by Wellington Management, is hedged through the shorting of Treasury bonds to reduce the exposure to interest rate risk.

“TIPS protect against inflation, but not interest rates,” Mr. Hanus said. “We don't like TIPS right now, period, because they're kind of overvalued.”

The floating-rate bank loans slice of the portfolio, also subadvised by Wellington, is a way to benefit from rising rates because the loans are pegged to the London Interbank Offered Rate, meaning the yields will adjust with rising rates.

The commodity allocation is managed on the long-only side by Parametric Risk Advisors LLC. There also is a long-short commodity allocation, managed by Mellon Capital Management and Commodity Strategies AG.

“We like commodities because it's a good link to inflation, but commodities also got killed in 2008, and we think that's unacceptable,” Mr. Hanus said. “We want some of the beta of commodities, which you get with the long-only, but we also want commodities in a long-short strategy.”

The inflation-sensitive equities slice of the portfolio is subadvised by the City of London Investment Group PLC and The Boston Company Asset Management LLC.

“If prices start rising due to inflation, the companies providing the underlying materials like metals and agricultural products such as sugar and corn tend to go up,” Mr. Hanus said. “All of these asset classes tend to do reasonably well when inflation is between 0% and 2.5%, but they do even better when it's above 2.5%.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Oct 09

Conference

Diversity & Inclusion Awards

Attend the industry’s first event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate... Learn more

Featured video

INTV

The bizarro world of DOL and SEC rule supporters

Managing editor Christina Nelson talks with senior reporter Mark Schoeff Jr. about why groups that supported the Labor Department's fiduciary rule oppose much of the SEC advice package, and vice versa.

Latest news & opinion

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business Student.com, which compared the cost of rent to average salaries.

9 best - new - financial adviser jokes

Scroll through for nine new financial adviser laughs.

Captrust, prominent 401(k) advice firm, ramps up its wealth management business

Captrust wants to grow annual revenue from wealth management to 50% from 30% over the next five years.

Fidelity CEO says zero-fee funds aimed at expanding its universe

Johnson says way to prosper in financial services is 'by building relationships.'

SEC advice rule contains a huge hole

Jay Clayton aims to clear up investor confusion by drawing a distinction between brokers and advisers in the agency's proposed package of revised standards. But where do dual registrants fit?

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print