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By Christine Benz | 07-18-2011 05:21 PM

Inflation Protection Beyond TIPS

Morningstar Investment Services' Marta Norton discusses incorporating real estate, commodities, high-yield, bank-loan, and global exposure to broaden a portfolio's inflation protection.

Christine Benz: Hi, I'm Christine Benz for We're talking about inflation on the site all this week, and I'm joined today by Marta Norton. She is an Investment Manager for Morningstar Investment Services, and her group has done a lot of research in how to protect a portfolio from inflation.

Marta, thanks for being here.

Marta Norton: Happy to be here, Christine.

Benz: So, I think people naturally think of TIPS as a good starting point for protecting a portfolio from inflation, but you believe that inflation protection doesn't start and stop with TIPS. What else should be part of a person's portfolio looking for inflation protection?

Norton: That's right. So, I think investors have go-to asset classes when they think of inflation protection, and TIPS is obviously one, since they're Treasury bonds that are adjusted for changes in the consumer price index. And commodities are another, which makes sense as they themselves are a source of inflation, and then you also have real estate, which is commonly brought up when people think of an inflation protection.

Benz: How good an inflation hedge is real estate? I'm curious about what your research shows?

Norton: Our research suggests that it can be an effective hedge, but there are also factors that can reduce its effectiveness. When you think of REITs, real estate investment trusts, they're collecting the rents from apartments or commercial properties in general. Often, those rents can tick up during inflation periods. So that's the value to them.

But at the same time, high vacancy rates or valuations can reduce the effectiveness of that hedge. So, we haven't found it to be a top contributor to inflation protection, but it's certainly something that I think investors traditionally look to, and it's something that I think can add value, but just at a smaller margin than maybe people assume.

Benz: Would that be global, would you say? A global real estate portfolio versus one that's domestic only?

Norton: We think globally at Morningstar Investment Services, and I think global is the way to go, especially if you're concerned about U.S. inflation. You can get diversification by broadening your portfolio.

Benz: Okay. So TIPS, real estate, commodities, are those baseline inflation protection exposures. What are some other things that maybe are a little off the beaten path that you think people should be thinking about?

Norton: Right, so when we run correlation figures across a wide variety of asset classes, we find a number of asset classes that kind of pop up as impressively related to the consumer price index movements, probably even more so than TIPS in certain periods.

Benz: So do tell.

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