3 Real Asset Strategies to Fight Inflation

In 2022, climbing inflation coupled with a sharp shift in monetary policy prompted many investors to consider inflation-resistant strategies. Such strategies are more tethered to tangible goods and services—sometimes called real assets—and can be found among the commodities broad basket, infrastructure, and utilities Morningstar Categories. As inflation gained momentum from May 2020 through May 2022, categories associated with real assets received more attention. The commodities broad basket category received $1.3 billion in net flows between the end of 2020 and the end of 2022 when it reached $32.8 billion net assets. Meanwhile, the infrastructure and utilities categories slowly grew in asset size over the past decade, with infrastructure hitting a 10-year peak and utilities nearing the same high-water mark in 2022.

As rates rose and inflation stabilized, investor interest diminished. Through the trailing one year ended July 2023, the commodities broad basket category saw outflows of $8.6 billion, utilities lost $1.7 billion, and infrastructure lost nearly $1.5 billion. These dramatic shifts in investor behavior aren’t surprising, but they don’t reflect a long-term approach here. For many diversified portfolios, a thoughtful allocation to inflation-resilient holdings simply improves the overall portfolio mix when inflation surprises.

Inflation is likely to be a greater unknown in the next decade than the last. In the years to come, there may be increasing demands on inflation-sensitive industries to meet the needs of energy transitions and growing populations. Several funds within the commodities broad basket, infrastructure, and utilities categories provide such potential benefits.

The team behind Pimco Commodity Real Return Strategy PCRAX skillfully navigates the commodities space and expresses fundamental views on prices, seasonality, roll yield, and storage costs. The fund has a Morningstar Medalist Rating of Bronze. It replicates the Bloomberg Commodity Index and layers atop smaller active positions, while the rest of the portfolio sits in Treasury Inflation-Protected Securities. As inflation spiked from May 2020 through May 2022, the fund’s A share class saw total returns of 50%.

The team navigates the shifting currents of commodities, with spread trades such as West Texas Intermediate oil versus Brent crude alongside analysis of agricultural impacts from geopolitical events and changing climate conditions. The total returns may not always be stellar, but this strategy can seize on a variety of inflation-sensitive opportunities and shifting market demands.

Lazard Global Listed Infrastructure GLFOX comes at the problem from a different angle, but it demonstrates an ability to similarly handle the pressures of inflationary markets and broad volatility. The Silver-rated strategy selects from monopolistic infrastructure companies in well-regulated environments. Beyond that, those companies must return 5% above inflation over a five-year period. The result is a narrow, higher-quality lineup. The performance impressed in the inflationary trailing two years ended May 2022, with the open share class delivering a 12.5% total return.

The fund usually holds 25-50 positions, heavily weighted toward utilities, toll roads, and rail lines within developed markets such as the United States and Western Europe. This framework, alongside the return guardrails, positions the portfolio for inflationary shocks and poises it to seize on growing infrastructure and utilities demands.

MFS Utilities MMUFX is another take on the real assets space. This Silver-rated fund takes a broad view on utilities, accessing companies ranging from electric and gas services to energy and telecom. Yet the team is careful in casting this wider net, keeping 92% of the portfolio in traditional utilities and the remainder in related opportunities. The A shares saw a 16% net return over the two years ended May 2022 as inflation rose higher.

A version of this article was published in the July 2023 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.