How Did Inflation-Protection Strategies Perform in 2021?

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Inflation came back with a vengeance in 2021. Here to discuss how multi-asset inflation funds performed this year is Bobby Blue. Bobby is a senior analyst with Morningstar's Manager Research team.

Hi, Bobby. Thanks for being here today.

Bobby Blue: Hi, Susan. Great to be here.

Dziubinski: Let's start out by defining our terms here, because these terms are interchangeable. What are diversified real asset or multi-asset inflation strategies? And why would an investor want to add them to a portfolio?

Blue: These are funds that are essentially a one-stop shop to get exposure to inflation-sensitive assets. When you think of inflation-sensitive assets, some of the main ones are commodities, real estate investment trusts, TIPS. These are going to form the bedrock of a lot of these portfolios, and you can find them in most of these strategies. They're also going to stray into other assets like natural resource equities. These are things like oil producers or miners as well as precious metals and even things like floating-rate debt or commercial mortgage-backed securities. So, that's a lot of different assets. And to find the different managers or different solutions to fill all of those different asset classes for an individual's portfolio can be a challenge. So, diversified real asset strategies offer the ability to get all of those in one--outsource some of the tricky manager selection and tactical allocation that can be necessary for some of these to a professional manager.

Dziubinski: Given that they are a little bit of a hodgepodge, it sounds like, what are the qualities that some of the best funds of this type share?

Blue: It's funny you used the word "hodgepodge" because we've used that a lot when we were looking at these strategies. What you want to avoid is a manager throwing all of these assets into a portfolio and saying, "Here's my diversified real asset strategy." You want someone to be thoughtful about the way they pick these assets, the way they combine them, the way they're allocating amongst the different assets, and you want a thoughtful risk-and-return profile with those underlying assets. Of course, the things that make a multi-asset offering good also apply to these strategies. You want good bottom-up research in forming the security selection as well as a thoughtful approach to tactical allocation between all of these assets.

Dziubinski: Let's talk a little bit about performance in general terms in 2021. We have seen inflation this year. How well have these funds done in the face of it?

Blue: They've done great. It's been really impressive to see it. So, we have 18 of these strategies that we track. Every single one of them actually performed in the top half of their category. These are spread across different allocation categories, but every single one without fail performed in the top half. Sixteen of them are actually in the top quintile. So, across the board, all of these funds have performed really well thanks to some pretty strong tailwinds from the assets they're investing in.

Dziubinski: Now, it sounds like they've all done pretty well, but have there been any standouts within the group? And really, if so, what's driven their performance?

Blue: On an absolute basis, what you're going to find is the funds that have done really well are those that have a little bit more equity exposure than peers. All of these assets are getting a tailwind, but when you're getting that equity risk premium combined with the inflationary forces, it's done really well. So, funds that have maybe higher exposure to REITs, higher exposure to natural-resource equities, that's been a good boost for them.

Dziubinski: And then, on the flip side, maybe which are the ones that haven't done quite as well or have struggled a little bit?

Blue: On an absolute basis, the ones that are skewed a little bit more toward the TIPS and fixed-income parts of the market, they're going to do a little worse on an absolute basis. Risk-adjusted, they look good. They look good compared to the equity-heavy peers. The ones that we have seen that have struggled a bit, have lagged the peer group, those have been--going back to what I said earlier--the ones that threw all the assets in, and there's just not a whole lot of thought into them. That's come back to bite them this year as we've seen tailwinds to different assets at different times of the year come back and help them.

Dziubinski: Given what we've seen this year in the market, if inflation persists in 2022, what can investors perhaps expect from these funds?

Blue: They should expect another good year. The assets that these funds are invested in are the primary drivers of inflation--commodities, natural-resource equities, real estate, all of these are the primary drivers of what we're seeing with the higher inflation right now. So, by having direct exposure to those assets, we expect that that will be a further tailwind in 2022.

Dziubinski: Now, it's time to name some names, Bobby. Share a couple of funds that are multi-asset inflation strategies that we like and why.

Blue: We have two medalist picks in this space, and each can fit different investors for different reasons. So, the DWS Real Assets Strategy (AAAZX), managed right here in Chicago, theirs is a pretty sizable liquid real asset team. DWS has dedicated teams for infrastructure, real estate, which is right where one of their strong suits are, as well as natural resources and commodities. In total, more than 30 investment professionals contribute to this strategy, and they have a really thoughtful approach to tactical allocation as well as that strong fundamental research from those individual teams. Now, one thing I will caution is it's a bit more equity-sensitive than some other strategies. So, an investor that wants to carve out an allocation to that should just be mindful that you're going to get a little bit more juice with this strategy, which can lead to some stronger drawdowns than peers in this space.

The second one, complete opposite, Pimco Inflation Response Multi-Asset (PIRMX). This is a conservative option that leans into Pimco's strengths in fixed income and commodities, and you'll find that over time it's added not only really good performance in inflationary periods, but it's also acted as a strong diversifier, past decade, which is why we have a Silver medal on that strategy.

Dziubinski: Thank you so much for your time today, Bobby. We appreciate it, and if inflation continues the way it's been, we'll be talking to you again in 2022.

Blue: Looking forward to it.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thanks for tuning in.