Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish

There’s more to inflation risk than meets the eye

Understanding and evaluating inflation risk in your portfolio is the first step to managing it effectively. Multi-Asset Strategists Nick Samouilhan and Adam Berger lay out a framework for investors to do just that.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

Over the past year, much has been written about the macro outlook for inflation post-COVID-19, but less ink has been spilled on addressing inflation squarely from the perspective of an asset allocator. That shortage of actionable inflation insights was one impetus for this series of white papers. After all, many asset owners are arguably less concerned with how high inflation might go than with what it actually means for their investment portfolios.

While the threat posed by inflation is often clear to investors with inflation-linked liabilities, even total-return-oriented investors are susceptible to inflation risk. However, this latter cohort tends to be less focused on (and thus, less prepared for) the harmful impacts inflation can have on their portfolios. All investors can benefit from recognizing the different sources of inflation risk, gauging their portfolios’ exposure to those risks, and taking appropriate steps to manage them.

In our view, the impact of inflation on investor portfolios is felt via three different dynamics: a) the transition from a low- to a high-inflationary state; b) the level of inflation; and c) the volatility of inflation. The interplay among these three dynamics can drive a range of distinct portfolio risks of which investors should be aware (see “Inflation is a formidable foe” sidebar). Here we present a framework for investors to understand and evaluate inflation risk in their own portfolios.

The three dynamics of inflation risk

A particularly pernicious aspect of inflation is that its impact on investor portfolios typically comes from three different, but interrelated, dynamics:

  1. The transition from low to higher inflation (or inflation expectations) often drives immediate changes in valuations across a range of asset classes; and
  2. The level of inflation at any given point in time is important, with higher levels of inflation having knock-on effects for economic growth and corporate profitability.
  3. The volatility of inflation impacts the accuracy (or lack thereof) of inflation expectations, with greater volatility making inflation harder to forecast.

All three types of inflation risk matter for investor portfolios and, of course, can be difficult to cleanly distinguish from one another. However, given that different portfolios are likely to be exposed to them in varying degrees, it is best to be…

To read more, please click the download link below.

Recommended for you

<span>Insurance Multi-Asset Outlook — </span>Strong but slowing growth: A tale of two narratives
Markets appear to be caught between two hard-to-reconcile narratives: The pace of economic growth looks poised to slow, but the level of growth is likely to stay relatively strong. Multi-Asset Insurance Strategist Tim Antonelli and Investment Strategy Analyst Daniel Cook offer insights for global insurers at this point in the cycle.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
Insurance Multi-Asset Outlook — Strong but slowing growth: A tale of two narratives
,
publish
Tim Antonelli
 CFA, FRM, SCR
The evolution of derisking:  Assessing new and time-tested  liability-hedging ideas
As defined benefit plans contemplate the best path to their eventual "end state," members of our LDI team update their liability-hedging research with a blend of traditional benchmark ideas and new opportunities to capitalize on changing market conditions and a broader investment universe.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
October 2021
The evolution of derisking: Assessing new and time-tested liability-hedging ideas
,
publish
Louis Liu
 PhD, CFA, ASA, MAAA
<span>Top of Mind</span> Investing for the long term (in a short-term world)
With short-term behavior evident across the financial landscape, Multi-Asset Strategist Adam Berger explores the intuitive and quantifiable advantages of being more long term, and he offers seven habits that can help asset owners cultivate a long-term mindset.exc
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
September 2021
Top of Mind Investing for the long term (in a short-term world)
,
publish
Chinese government bonds: How do they measure up in a multi-asset framework?
As China's bond market continues to grow in size and liquidity, we consider the potential role the country's government bonds can play in diversifying a broader sovereign portfolio, improving yields, and offsetting equity risk.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
August 2021
Chinese government bonds: How do they measure up in a multi-asset framework?
,
publish
Update on key sustainability initiatives
We highlight progress on key sustainability initiatives: interim targets for our net-zero commitment, inclusion of location data in climate disclosures, and expanding our compliance with SFDR.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
August 2021
Update on key sustainability initiatives
,
publish
Why global insurers should take a closer look at REITs
Insurance Strategist Max Davies, Investment Director Will Lee, and Investment Specialist Ethan Sales look at the potential benefits of REITs for global insurers, plus why now may be an opportune time to consider this often unsung asset class.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
August 2021
Why global insurers should take a closer look at REITs
,
publish
Rethinking growth and where long/short directional strategies fit in
With allocators looking for opportunities to recalibrate their growth exposures, Multi-Asset Strategist Cara Lafond shares her “best fit” criteria for long/short directional strategies and explains why the financial sector appears to check all the boxes.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
July 2021
Rethinking growth and where long/short directional strategies fit in
,
publish
Are we on the cusp of an  unconstrained bond fund “renaissance”?
Portfolio Managers Brian Garvey and Brij Khurana and Investment Director Brian Doherty see unconstrained fixed income approaches, if properly implemented, as being well suited to the current (or any) market environment.
Archived insights remain available on the site. Please consider the publish date while reading these older insights.
publish
July 2021
Are we on the cusp of an unconstrained bond fund “renaissance”?
,
publish