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A Solid Hedge Against Inflation

Bobby Blue

Bobby Blue: Even though inflation has remained tepid for the decade post-financial crisis, protection against inflation surprises is something prudent investors may seek out in their portfolios. Principal Diversified Real Asset fund offers these investors a thoughtfully constructed option that provides exposure to asset classes that have historically shown a high sensitivity to inflation.

Commodities like timber, metal, oil, and even water appear in the portfolio. These are useful to fend off inflation surprises; the price of these assets often shoots up considerably after a big CPI beat. Longer-term inflationary hedges like infrastructure and real estate receive allocations, too. These assets can be volatile in the short term--often exhibiting equity-like volatility--but over the long term they tend to correlate nicely to inflation. Currency, floating rate debt, and TIPS make up a real return bucket, which, while having a lower sensitivity to inflation than commodities, moves in line with interest rates and offers low volatility. The fund has long-term weights for each asset class, but the managers will often tweak allocations based on their view of the macro environment. 

The team at Principal selects mostly external managers to run sleeves in this portfolio. The subadvisor roster consists of 10 different teams, many of whom are at firms that specialize in the niche asset classes that appear in this Real Asset fund. These managers can be hard for noninstitutional investors to access--and oftentimes wouldn’t make sense as a standalone investment anyways--so the bundling here is appealing in itself.

Investors should look past the fund’s recent underperformance. This fund is designed to serve a purpose: Hedge against inflation. The low inflationary environment has been a drag, but investors that remember the late 70s understand how painful inflation can be, and how real asset exposure can benefit a portfolio. For those folks, carving out an allocation to an inflationary hedge can be a good idea, and this fund provides a solid option.