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By Andrew Gogerty | 08-26-2009 03:07 AM

Income Investors Must Expand Horizons to Beat Inflation

WHG Income's Mark Freeman says investors will have to look at nontraditional areas of the income market to offset the impact of higher inflation.

Andrew Gogerty: You know one of the headwinds to income or one of the things that can really put a damper on it is inflation. And it has been talked about for a year, year-and-a-half now, but I'm curious to get your opinion or insight as a bond investor or even in bond investing in general. How can investors or what steps should they look at to potentially fight that if they have the opportunity to?

Mark Freeman: If inflation becomes an issue, income investors are going to have basically be more flexible in terms of their opportunities that they are willing to consider. If you look at traditional fixed income and where yields are today, there is not much room or protection for higher inflation down the road for those securities.

So I think income investors are going to have to again broaden their perspective in terms of the types of asset classes that they are willing to consider and look for opportunities in those other income-oriented asset classes, because especially in an higher inflation environment, as we all know, in a fixed income environment where basically the coupon payment is fixed, inflation is basically the worst thing for a bond investor. And so the potential for capital appreciation to potentially offset some of the negative impacts from inflation becomes really of critical importance.

So having said that, I think that's one aspect that investors can focus on. From there, the others are going to be explicitly inflation oriented type securities likes TIPS (Treasury Inflation Protective Securities). So I think those types securities also are going to have to play a role.

But at the end of the day, investors are going to have to be flexible and they are going to have to be willing to look at perhaps some nontraditional areas of the income market in order to meet and to offset, if you will, the impact of higher inflation should that come to pass.

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