Robo-advisers brace portfolios for rising inflation

As consumers face the highest inflation rate in more than 30 years, robo-advisers have shored up their portfolios to ensure clients are protected against rising prices.

Morgan Stanley & Co.’s Inflation Conscious portfolio has benefited from hedging against the potential for inflation and outperformed its benchmarks, according to a recent study of leading robo-advice platforms by the consultancy firm Backend Benchmarking.

The portfolio invests heavily in an energy fund, called Tortoise North American Pipeline (TPYP), and the diversified commodities fund Invesco Optimum Yield Diversified Commodity (PDBC), which saw returns of 30.69% and 37.94%, respectively, over the first three quarters of the year as energy prices soared.

“These are specialized funds that have done particularly well in light of higher energy prices,” said Thomas Leahy, senior financial analyst at Backend Benchmarking. “Small allocations to these asset classes can provide meaningful inflation protection as they did in 2021.” 

As the stock market slowed in the third quarter, investors continued to process multiple market influences like supply chain disruptions and pent-up demand from reopening economies, according to the study.

“This proved to be an interesting year to monitor which robo-advisers had portfolios positioned for rising inflation and rising interest rates,” said David Goldstone, manager of investment research at Backend Benchmarking. 

“Investors in Morgan’s Inflation Conscious Portfolio can rest assured that their thematic portfolio followed through with its theme,” Goldstone said, adding the recent inflation had coincided with multiple factors that specifically bolstered energy companies.

Charles Schwab & Co.’s robo-adviser also saw upside as inflation loomed. The company's Domestic Focus portfolios took both year-to-date top equity and year-to-date top bond performing funds of the year.

“The Schwab portfolio benefited from investments in ETFs that were weighted by fundamentals, which emphasize metrics like dividends and operating cash flow, as opposed to traditional market-cap-weighted index funds,” Leahy said.

While gold is traditionally an asset class that's frequently used to hedge against inflation, it has underperformed, the report noted. The iShares Gold Trust ETF (IAU) was down more than 7.5% in the first three quarters of the year.

“If investors are looking for easy-to-access and diversified inflation-protection investments, these ... robo advisers have proven to be effective choices for an inflationary environment thus far,” he said.