How assets like gold, real estate and commodities can support a well-rounded investment strategy during inflation

Investors today are navigating a global economy in the late stage of the business cycle. Underlying growth appears robust but increasingly vulnerable, leading to downward revisions in many growth forecasts.

Inflation, already high, has risen further, and markets have priced in rapid monetary tightening as central banks rush to control price spikes. Supply shortages persist in areas ranging from labour to semiconductors, and the Ukraine crisis has further upended supply chains and sent commodity prices surging.

In this late-cycle environment, a multi-real-asset strategy can help fight inflation in portfolios. Here are three reasons why:

1. It offers potential protection against inflation

Analysing almost 50 years of data from 1973 to 2022, it was observed that traditional asset classes like broad-based equities and bonds generally fall in value when inflation increases.

Real assets, however, historically have tended to be effective as inflation hedges – they not only do well when inflation is rising, but actually benefit from higher levels of inflation. Examples of inflation-sensitive assets include commodities (one of the best performing asset classes this year), inflation-linked bonds, real estate and select currencies.

2. It offers diversification from equities and nominal bonds¹

The United States Federal Reserve sees 2 per cent inflation as the sweet spot: a sign of a healthy, growing economy. At that level of inflation, historical data shows that the returns on stocks and bonds have a negative correlation – when one goes up, the other goes down.

However, when inflation starts to exceed that sweet spot, then stocks and bonds tend to move in the same direction – typically down – which means there is less diversification via the classic equity-bond combination in a portfolio. This is what many investors are seeing today.

To get the diversification they seek, investors may consider rebalancing their portfolio and adding an allocation to real assets, which generally have modest correlations to traditional assets.

3. It offers diversification within real assets

Different real assets will perform differently depending on the macroeconomic environment. Commodities, for example, tend to perform best during high inflation and high growth environments. In an environment of high inflation but slowing growth, gold and inflation-linked bonds are usually among the best performing asset classes.

Trying to pick one real asset class in any given environment, however, involves a lot of timing risk. By combining a variety of inflation fighters, a portfolio may be more resilient in a broader range of inflationary regimes and have a more modest volatility profile. 

Even in a more muted inflationary environment, a multi-real-asset approach has the potential to deliver positive and meaningful absolute returns because of its diversified underlying exposure.

About PIMCO GIS Inflation Multi-Asset Fund

The PIMCO GIS Inflation Multi-Asset Fund is a highly-diversified strategy that’s designed to hedge global inflation risks while targeting enhanced after-inflation return. It invests across (but is not limited to) inflation-linked bonds, real estate, commodities, gold and emerging market currencies. The fund aims to preserve the real value of capital through prudent investment management and predominantly invests in a diversified portfolio of inflation-related assets.

Through active management within each real asset and tactical rotation across the different sectors, the fund seeks to balance the risk contribution from each real asset component. It leverages PIMCO’s time-tested investment process that combines top-down macroeconomic views with bottom-up research and analysis.

As a global inflation solutions leader with deep real asset expertise, PIMCO is uniquely placed to deliver inflation protection.

Learn more about how the PIMCO GIS Inflation Multi-Asset Fund can help your portfolio.

Footnote:

¹ Nominal bonds are bonds that make fixed interest payments, rather than fixed inflation-adjusted payments.

Important Information

This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

Past performance is not a reliable indicator of future results. Investment involves risk including possible loss of the principal amount invested. PIMCO Funds: Global Investors Series plc (“PIMCO GIS”) is an umbrella type open-ended investment company with variable capital and is incorporated with limited liability under the laws of Ireland with registered number 276928. PIMCO Funds: Global Investors Series plc has appointed PIMCO Asia Pte Ltd as the Singapore Representative. The fund may use or invest in financial derivative instruments and be subject to various risks (including for e.g. liquidity risk, interest rate risk, market risk, credit risk and management risk etc.) associated with such investments in financial derivative instruments. A fund’s use of, or investment in, financial derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Participation in the markets for financial derivative instruments involves investment risks and transaction costs to which a fund may not be subject if such strategies are not used. Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information is contained in the Fund’s Singapore Prospectus which is available and can be obtained from our website www.pimco.com.sg or by contacting the Singapore Representative or a distributor of the Fund. Prospective investors should read the Fund’s Singapore Prospectus before deciding whether to subscribe for or purchase shares in any of the Funds. Investors may also wish to seek advice from a financial adviser before making a commitment to invest and in the event you choose not to seek advice, you should consider whether the investment is suitable for you. The value of shares of the Fund and the income accruing to them, if any, may fall or rise. The Funds typically offer different share classes, which are subject to different fees and expenses (which may affect performance), have different minimum investment requirements and are entitled to different services. Unless otherwise stated in the prospectus, the Fund referenced in this material is not managed against a particular benchmark or index, and any reference to a particular benchmark or index in this material is made solely for risk or performance comparison purposes. PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services license and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of PIMCO. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. © PIMCO, 2022
 

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