How assets like gold, real estate and commodities can support a well-rounded investment strategy during inflation
Investors today are navigating a global economy in the late stage of the business cycle. Underlying growth appears robust but increasingly vulnerable, leading to downward revisions in many growth forecasts.
Inflation, already high, has risen further, and markets have priced in rapid monetary tightening as central banks rush to control price spikes. Supply shortages persist in areas ranging from labour to semiconductors, and the Ukraine crisis has further upended supply chains and sent commodity prices surging.
In this late-cycle environment, a multi-real-asset strategy can help fight inflation in portfolios. Here are three reasons why:
1. It offers potential protection against inflation
Analysing almost 50 years of data from 1973 to 2022, it was observed that traditional asset classes like broad-based equities and bonds generally fall in value when inflation increases.
Real assets, however, historically have tended to be effective as inflation hedges – they not only do well when inflation is rising, but actually benefit from higher levels of inflation. Examples of inflation-sensitive assets include commodities (one of the best performing asset classes this year), inflation-linked bonds, real estate and select currencies.
2. It offers diversification from equities and nominal bonds1
The United States Federal Reserve sees 2 per cent inflation as the sweet spot: a sign of a healthy, growing economy. At that level of inflation, historical data shows that the returns on stocks and bonds have a negative correlation – when one goes up, the other goes down.
However, when inflation starts to exceed that sweet spot, then stocks and bonds tend to move in the same direction – typically down – which means there is less diversification via the classic equity-bond combination in a portfolio. This is what many investors are seeing today.
To get the diversification they seek, investors may consider rebalancing their portfolio and adding an allocation to real assets, which generally have modest correlations to traditional assets.
3. It offers diversification within real assets
Different real assets will perform differently depending on the macroeconomic environment. Commodities, for example, tend to perform best during high inflation and high growth environments. In an environment of high inflation but slowing growth, gold and inflation-linked bonds are usually among the best performing asset classes.
Trying to pick one real asset class in any given environment, however, involves a lot of timing risk. By combining a variety of inflation fighters, a portfolio may be more resilient in a broader range of inflationary regimes and have a more modest volatility profile.
Even in a more muted inflationary environment, a multi-real-asset approach has the potential to deliver positive and meaningful absolute returns because of its diversified underlying exposure.
About PIMCO GIS Inflation Multi-Asset Fund
The PIMCO GIS Inflation Multi-Asset Fund is a highly-diversified strategy that’s designed to hedge global inflation risks while targeting enhanced after-inflation return. It invests across (but is not limited to) inflation-linked bonds, real estate, commodities, gold and emerging market currencies. The fund aims to preserve the real value of capital through prudent investment management and predominantly invests in a diversified portfolio of inflation-related assets.
Through active management within each real asset and tactical rotation across the different sectors, the fund seeks to balance the risk contribution from each real asset component. It leverages PIMCO’s time-tested investment process that combines top-down macroeconomic views with bottom-up research and analysis.
As a global inflation solutions leader with deep real asset expertise, PIMCO is uniquely placed to deliver inflation protection.
Learn more about how the PIMCO GIS Inflation Multi-Asset Fund can help your portfolio.
1 Nominal bonds are bonds that make fixed interest payments, rather than fixed inflation-adjusted payments.
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