Amidst much talk about rising inflation, investors are scrambling to find ideas and strategies to hedge against the impact of rising consumer prices.
While much of the talk revolves around transient inflation, which means that a high Consumer Price Index (CPI) could be short-lived, investors need to prepare for a longer period of higher prices. than expected, and active management may be the way to do it. In fact, investors can gain important insight into how active managers position portfolios to deal with rising prices.
“The market has become increasingly worried, depending on the breakeven rate for 10-year Treasury bills and inflation-protected Treasury securities,” writes Morningstar analyst Alec Lucas. “Since the Fed’s policy change, the spread between their returns, an indicator of investors’ inflation expectations over the next decade, has grown from around 1.7% to over 2.5% recently. . “
One obvious area where good active management can shine in inflationary environments is stock selection. Historically, advisers and investors have looked to gold and Inflation-Protected Treasury Securities (TIPS) to protect themselves from the ravages of a rising CPI.
However, many players in the asset market are programmed to believe that they are good inflation fighters and are not as closely correlated with a rise in the CPI as investors are led to believe. The right mix of stocks can in fact be one of the best inflation-fighting tools that investors can adopt.
âEquities, on the other hand, have consistently increased the purchasing power of long-term investors, thanks to the ability of companies to raise prices and create new sources of value,â adds Lucas. âOver rolling 10-year periods measured quarterly, the return of the S&P 500 has exceeded the CPI in every epoch since the 1950s, except when inflation reigned from the mid-1970s to the early 1980s and during the Depths. and the consequences of the 2008 global financial crisis. “
Fortunately, investors don’t have to expand into complex territory when it comes to using stocks to hedge against inflation, as dividend growth strategies typically reward anti-inflation tools. ‘inflation. One actively managed concept on this front is the T. Rowe Price Dividend Growth ETF (TDVG).
Dividend growth has been known to outperform inflation for several decades, but TDVG adds another advantage with its active management. Not all sectors that dominate passive payment strategies are correlated equally with inflation, so it may be better to proactively overweight sectors with pricing power when the CPI rises.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.