Asset Allocation

PIMCO: TIPS the New Investing Bedrock Amid Rising Inflation, Commodity Prices

<em>Amid increasing inflation and higher commodity prices, developed nations will likely seek to lower their debt levels by favoring Treasury Inflation Protected Securities, according to Pacific Investment Management Co.'s Mihir Worah.</em>
Reported by Featured Author

(June 18, 2012) — The key asset for investors seeking to hedge inflation should be Treasury Inflation Protected Securities, Mihir Worah of Pacific Investment Management Co. (PIMCO) says, noting that this asset class should be the bedrock of any inflation-hedging strategy.

“Has the world become too comfortable with inflation, counting on little or no price pressures for the foreseeable future?” Worah writes in an economic outlook. Structuring portfolios in an attempt to guard against high inflation should be a central element of any investment strategy, says Worah, managing director in PIMCO’s Newport Beach office, a portfolio manager, and head of the real return portfolio management team.

As a result, according to Worah, a secular rise in global commodities prices — with some cyclical dips — will likely occur as the middle class expands in emerging markets in the years ahead.

Worah continues: “Investors may wish to venture out into slightly more volatile assets in order to seek potentially higher returns; these include real assets such as commodities, as well as dividend-yielding equities and real estate investment trusts (REITs).”

Read PIMCO’s economic outlook here.

Worah’s comments follow a survey conducted by the Economist Intelligence Unit (EIU) — released in May — that showed that investors are turning cold toward commodities and emerging markers. In percentage terms, support for commodities fell from over a quarter of investors believing they would perform strongly last year to just 14% this year.

The research body said the notable turnaround reflected “lower demand for many raw materials from sluggish developed markets in the Eurozone and elsewhere”.

Emerging market equities — which tied with commodities for the top spot last year — were also toppled as investors turned fearful over their short term prospects. Equities listed in the investors’ home countries sat at the top of this projected performance table, with 26% of the vote.