The transition to the later stages of the business cycle calls for creative portfolio solutions to hedge against increased inflation risk. Here are four ideas.
After one of the slowest expansions in history, the global economy is heating up and long- dormant inflation pressures are beginning to build. This cyclical shift—combined with unusual late-cycle tax cuts, rising protectionism and the unprecedented unwinding of quantitative easing—is thrusting investors into uncharted territory.
In this environment, we believe investors should consider increasing allocations to reflation-oriented asset classes that have the potential to enhance real returns.
Global Real Estate Securities—Rent growth has historically outpaced inflation, while correlations with equities are at a 16-year low
Global Listed Infrastructure—Contracted cash flows often have rate escalators tied to inflation, while increasing economic activity could drive higher throughput volumes
Multi-Strategy Real Assets—A history of positive inflation sensitivity and equity-like returns, with lower potential volatility than standalone investments in real assets
Low-Duration Preferred Securities—Combines the potential for high tax-advantaged income with low sensitivity to rising interest rates
Index Associations and Definitions
An investor cannot invest directly in an index and index performance does not reﬂect the deduction of any fees, expenses or taxes.
Page 2 • Global Real Estate Securities: U.S. REITs: FTSE Nareit Equity REIT Index contains all tax-qualified REITs, except timber and infrastructure REITs, with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property that also meet minimum size and liquidity criteria. Global REITs: FTSE EPRA/Nareit Developed Real Estate Index is an unmanaged market-capitalization-weighted total-return index, which consists of publicly traded equity REITs and listed property companies from developed markets. Global equities: MSCI World Index consists of a wide selection of stocks traded in 24 developed countries, weighted for market capitalization.
Page 3 • Global Listed Infrastructure: Infrastructure: FTSE Global Core Infrastructure 50/50 Net Tax Index, a capitalization-weighted index of worldwide infrastructure and infrastructure- related securities (net of dividend withholding taxes), with constituent weights adjusted semi-annually according to three broad industry sectors: 50% utilities, 30% transportation, and a 20% mix of other sectors, including pipelines, satellites and telecommunication towers. Global equities: MSCI World Index (see above).
Page 4– 5 • Multi-Strategy Real Assets: U.S. stocks: S&P 500 Index is an unmanaged index of 500 large-capitalization stocks that is frequently used as a general measure of U.S. stock market performance. Global stocks: MSCI World Index (see above). U.S. bonds: ICE BofAML U.S. 7-10 Year Treasury Index: composed of U.S. Treasury notes with a 7-10 year maturity. Real estate: Through February 2005: U.S. REITs; thereafter: Global REITs (see above). Infrastructure: Through July 2008: 50/50 Blend of Datastream World Pipelines and Datastream World Gas, Water & Multi-Utilities, encompassing global indexes of companies in their respective sectors, compiled by Thomson Reuters Datastream; thereafter: Dow Jones Brookfield Global Infrastructure Index measures the stock performance of publicly listed infrastructure companies representing all sectors of the infrastructure market. Commodities: Through July 1998: S&P
GSCI, a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities; thereafter: Bloomberg Commodity Total Return Index, a broadly diversified index composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metals Exchange. Natural Resource Equities: Through May 2008: Datastream World Oil & Gas and Datastream World Basic Materials, encompassing global indexes of companies in the basic materials sector, compiled by Thomson Reuters Datastream; thereafter: S&P Global Natural Resource Equities Index, includes 90 of the largest publicly traded companies in natural resources and commodities businesses that meet specific investability requirements, offering investors diversified, liquid and investable equity exposure across three primary commodity-related sectors: Agribusiness, Energy and Metals & Mining.
Page 6 • Low-Duration Preferred Securities: Low-Duration Preferred Securities: ICE BofAML 8% Constrained Developed Markets Low Duration Capital Securities Custom Index tracks the performance of select U.S. dollar-denominated fixed- and floating-rate preferred, corporate and contingent capital securities, with remaining term to final maturity of one year or more, but less than five years. 5/10/30-Year Treasuries: ICE BofAML Current U.S. Treasury Index series are one-security indexes consisting of the most recently issued U.S. Treasury note with the indicated maturity. Corporate Bonds: ICE BofAML Corporate Master Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. Low-Duration Corporate Bonds based on a subset of this index, representing securities with maturities of 1-5 years. Municipal Bonds: ICE BofAML Municipal Master Index tracks the performance of U.S. dollar-denominated investment-grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. Low-Duration Municipal Bonds based on a subset of this index, representing securities with maturities of 1-5 years. U.S. High Yield: ICE BofAML U.S. High-Yield Indextracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market.
Data quoted represents past performance, which is no guarantee of future results. This material is provided for informational purposes only and reflects the views of Cohen & Steers, Inc. and sources believed by us to be reliable as of the date hereof. No representation or warranty is made concerning the accuracy of any data compiled herein, and there can be no guarantee that any forecast or opinion in these materials will be realized. This is not investment advice and may not be construed as sales or marketing material for any financial product or service sponsored or provided by Cohen & Steers, Inc. or any of its affiliates or agents.
This is not an inducement to buy or sell commodity interests.
Cohen & Steers Capital Management, Inc. (Cohen & Steers) is a registered investment advisory firm that provides investment management services to corporate retirement, public and union retirement plans, endowments, foundations and mutual funds.