Investment Strategies

PIMCO GIS Inflation Multi-Asset Fund Update

Watch Product Strategist Georgi Popov discuss the benefits of real assets and how investors can incorporate inflation protection into their portfolios.


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FULL PAGE HEADER GRAPHIC: Why should investors consider adding real assets to their portfolios today?

Ribbon Graphic ID: GEORGI POPOV, Product Strategist

Popov: Well, two main reasons. The first one is quite obvious, the second one probably not as obvious but very important today. So the first reason is preserving purchasing power of assets.

So investors invest for the long run, and they really care about what their portfolio will be worth at some point in the future, so preserving purchasing power is quite important, and this is where real assets are really helpful.

The second reason is diversification. So typically, in a normal environment, inflation is around 2%. We call that the healthy level of inflation.

0:14:00.8 And when inflation is at that level, historically, we’ve observed stock-bond correlation being negative. So around negative 0.2 if you look at the S&P 500 and 10 year nominal treasuries.

FULL PAGE GRAPHIC: High inflation often leads to higher stock/bond correlations

However, when inflation starts to exceed that level, if it’s 3%, 4%, 5%, and today it’s in the 7% to 8% range, then you see stock-bond correlations starting to rise, and this is exactly what we’re observing today. Stock-bond correlations are positive, which means that you have less diversification by combining stocks and bonds in a portfolio.

In other words, if investors want to have the same level of diversification in their portfolio today than they had last year, they need to act. They need to rebalance their portfolio and also consider adding real assets.

FULL PAGE HEADER GRAPHIC: How should investors incorporate inflation protection into their portfolios?

0:14:58.5 Incorporating inflation protection in the portfolio starts with incorporating real assets, and real assets are assets that have positive sensitivity to inflation. In other words, they do well when inflation is rising, so they protect from inflation, but they also benefit from higher level of inflation.

We’re seeing that today. Commodities are one of the best performing asset classes this year today, when inflation is rising. Of course, there are many other factors in the global environment that impact that, but the moving commodities is consistent with what we would expect when inflation is rising at this level.

FULL PAGE GRAPHIC: Asset class performance is dependent on the economic environment

Now, which real assets and how much to put in the different real assets, we need a framework for that.

0:16:03.0 In other words, different assets will perform best in different macroeconomic environments. So if we think about growthand inflation, for example, commodities will perform best when we have high inflation and high growth. If we have an environment of high inflation but slowing growth, gold and TIPS will be one of the best performing asset classes.

So that means that when we think about designing portfolios, we think about portfolios that would do well in a variety of macroeconomic environments, so not designed for only one case of the world, not even only our base case, but resilient in a variety of macroeconomic environments.

FULL PAGE HEADER GRAPHIC: What are the benefits of a multi-asset approach when investing in real assets?

So the benefits of multi real approach are numerous.

FULL PAGE GRAPHIC: Why allocate to a multi-real asset solution now?

The first one of course is around inflation protection, a very potent inflation hedge, in many cases inflation beta of this portfolio could be around 2 or 3. So not as high as commodities, but higher than standalone inflation linked bonds.

Also, I mentioned the diversified nature of this portfolio can lead to a more modest volatility profile. Also, because we’re combining a variety of inflation fighters, the portfolio may be resilient in a broader range of macroeconomic environments, either inflationary growth or stagflation, because these portfolios invest across inflation linked bonds and commodities, real estate, etc.

0:22:10.2 The other important benefit to mention is that these multi real portfolios are profitability managed. In other words, the investors don't need to choose if they want to invest in inflation linked bonds or commodities or real estate and then try to time the market and go in and out of the different sectors, but rather, they get an all in one portfolio of these inflation fighters that is dynamically reallocated and rebalanced through time.

The other thing to mention here is that with a multi real approach, investors don't necessarily need to see high level of inflation to see attractive returns. Of course, as a multi real portfolio, it’s expected that the strategy perform best when inflation is either high or rising.

0:23:02.9 But even in a more muted inflationary environment, we could expect the portfolio to deliver positive and meaningful absolute returns because, again, of the diversified underlying exposure.

And the last but not least benefit here is active management. Active management can provide the benefits of not only higher expected return but also managing risks.

So for example, if we’re in an environment of elevated shocks and a risk off environment, the portfolio could lean more toward the shock absorbers such as inflation linked bonds and gold, or if we’re in an environment where we have healthier markets and it’s a more risk on environment, then the portfolio could be tilted towards more growth oriented segments such as commodities and REITs.


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