Preparing for a shift in the economic climate, several fund companies are launching funds designed as inflation hedges.
The Dreyfus Corp.,
BlackRock Inc. and BNY Mellon Asset Management are planning or have recently brought to market mutual funds that invest in a diversified mix of securities — including commodities, real estate investment trusts and Treasury inflation-protected securities — and seek to perform well during inflationary periods. A fourth money manager, AllianceBernstein LP, is creating a platform of funds that financial advisers can bundle to provide an inflation hedge for clients.
“Advisers are trying to figure out how to hedge against inflation, and the only tools available to them are TIPS funds and gold funds,” said Don Phillips, managing director at Morningstar Inc. “Most advisers I talk to would like a more diversified means to do this.”
“Funds of funds” that hedge against inflation can be particularly attractive to advisers who serve the 401(k) market, experts said.
“Rather than have a commodities fund, a TIPS fund and a REIT fund in a 401(k) plan, I would rather see a bundled product that covers all of those areas,” said Robert Wander, president of Wander Financial Services LLC, which manages $40 million in assets. “In all likelihood, plan participants aren't going to use the single strategies correctly, so I would prefer to have that total solution that hedges against inflation.”
Although Federal Reserve Chairman Ben Bernanke signaled last month that the Fed has no plans to raise the main interest rate, currently near zero, for an “extended period,” experts and advisers still worry about the long-term potential for rising rates and inflation.
“The longer interest rates stay low, the more the demand for these products goes up, because people are getting more anxious,” said Jonathan Kreider, a fiduciary re-search analyst at Lipper Inc.
Not everyone agrees that fund companies' rush to inflation-hedging strategies is in the best interests of clients.
“This is a copycat industry where companies launch products today that play on the fear of investors,” said Jim Cronin, president of Sentinel Investments.
And it remains unclear if advisers will bite at this latest round of offerings, considering that most prefer to create their own bundled portfolios of funds for clients, rather than buy a prepackaged one off the shelf.
What most experts and advisers can agree on, however, is that TIPS alone don't offer enough yield protection against inflation. And commodities such as gold have become so popular that there are fears that a bubble is developing, said Eric Jacobson, director of fixed-income research at Morningstar.
“Everyone right now seems to be wildly concerned about inflation, given the debt issues in the United States,” he said. “But at the same time, advisers want to have a lot of different irons in the fire to hedge against inflation.”
BlackRock is planning to launch two funds of funds this year to help its defined-contribution-plan clients hedge against inflation.
“We have our eye on inflation,” said Kristi Mitchem, head of the U.S. defined-contribution business at BlackRock. “We are thinking about products that would be easy for the plan participant to use.”
Specifically,
BlackRock is considering creating a fund of funds that would invest in a mix of TIPS, commodities and REITs, Ms. Mitchem said.
The firm also is discussing the launch of a bundled portfolio this year composed of certificates of deposit. “It's a way of providing diversified exposure while ensuring that the investor never reaches the $250,000 limit,” Ms. Mitchem said. The Federal Deposit Insurance Corp. insures up to $250,000 in bank deposits.
OUTPACING INFLATION
“We are looking to help participants deliver high returns and guarantees in the wake of 2008,” she said.
Last month, BNY Mellon Asset Management introduced the Real Asset Strategy, a portfolio that invests in global inflation-protected securities, commodities and natural resources for institutional clients, including retirement plans.
“Clients told us that they weren't willing to accept passive exposure to commodities,” said Jeffrey B. Saef, director of multistrategy investment solutions at BNY Mellon. “At the same time, they said they didn't just want an eclectic portfolio; they wanted something that would outpace inflation.”
In September, Dreyfus, which is the retail arm of BNY Mellon Asset Management, launched the Dreyfus Satellite Alpha Fund, a fund of funds that invests in natural resources, emerging-markets debt, real estate and securities, said Phil Maisano, vice chairman and chief investment officer at Dreyfus.
“We had heard from advisers that the "single answer, single strategy' didn't work,” Mr. Maisano said.
Meanwhile, AllianceBernstein in January launched its first two funds — the AllianceBernstein Bond Inflation Strategy and the AllianceBernstein Municipal Bond Inflation Strategy — that will make up a platform of portfolios aimed at helping advisers hedge against inflation, said Harold L. Hughes, senior managing director and head of U.S. retail for AllianceBernstein Investments. AllianceBernstein plans to add a number of funds to the platform over the next several months, he said.
“All you have to say to an adviser is "inflation protection,' and they ask you to tell them more, which is not usually what you get from a busy adviser,” Mr. Hughes said.
E-mail Jessica Toonkel Marquez at [email protected].
