09.22.2011
By Terry Flanagan

Macro Trouble Spells Inflation

PIMCO launches Inflation Response Multi-Asset Fund.

In a risk on, risk off investing climate, roiled by uncertainty in the marketplace, few phenomena are evident. Among them, is inflation, whose advent been debated by economists and market participants.

Whether true inflation (which may be defined by some as wage-induced) is upon us in the near future (unlikely given the state of the U.S. labor market), currencies of the developed economies are weakening while global commodity prices are rising.

PIMCO, (Pacific Investment Management Company) the world’s largest provider of bond funds, projects the negative correlation between currencies and commodities as a sign of rising inflation as a long-term trend.

“A weakening US dollar combined with what we see as the Federal Reserve’s inflationary bias will also add to this longer-term inflation pressure,” said Mihir Worah, a managing director in Newport Beach, California.

Worah will manage the firm’s newly launched PIMCO Inflation Response Multi-Asset Fund for “investors looking to hedge global inflation risks and take advantage of returns that inflation dynamics offer,” according to a spokesperson. The new fund is designed to avoid “traditional inflation hedges, which may be limited in scope, and may be limiting in a multi-speed world.”

The firm does not refer to any specific traditional inflation hedges, but some market participants criticize the most common inflation fighter– TIPS (Treasury Inflation Protection Securities) as an ineffective as a solo combatant. Until maturity, holders of TIPS do not realize capital.

The PIMCO Inflation Response Multi-Asset Fund hopes to be more dynamic. It combines the firm’s signature real return expertise and risk factor approach to active asset allocation.

“We believe that investors should always be prepared for the risk of rising inflation. In fact, although commodity prices have eased lately, we see them continuing to rise over the next few years,” said Worah.

The PIMCO Inflation Response Multi-Asset Fund hedges against inflation by investing in a range of assets that protect against different types of rising inflation: TIPS, commodities, emerging market currencies, real estate investment trusts and gold.

“Traditional inflation hedges often don’t provide an effective response to the wide-ranging drivers of inflation,” said Worah. “The PIMCO Inflation Response Multi-Asset Fund takes a comprehensive approach to arm investors with key inflation-sensitive assets and PIMCO’s real return expertise helps us determine how much of each asset to buy in any given environment.”

In addition to asset allocation, the fund will incorporate tail risk hedging strategies, intended to limit the impact of severe market shocks.

Such strategies are designed to protect against downside risk while positioning inflation-related assets to benefit from inflation dynamics.

PIMCO launches Inflation Response Multi-Asset Fund.

In a risk on, risk off investing climate, roiled by uncertainty in the marketplace, few phenomena are evident. Among them, is inflation, whose advent been debated by economists and market participants.

Whether true inflation (which may be defined by some as wage-induced) is upon us in the near future (unlikely given the state of the U.S. labor market), currencies of the developed economies are weakening while global commodity prices are rising.

PIMCO, (Pacific Investment Management Company) the world’s largest provider of bond funds, projects the negative correlation between currencies and commodities as a sign of rising inflation as a long-term trend.

“A weakening US dollar combined with what we see as the Federal Reserve’s inflationary bias will also add to this longer-term inflation pressure,” said Mihir Worah, a managing director in Newport Beach, California.

Worah will manage the firm’s newly launched PIMCO Inflation Response Multi-Asset Fund for “investors looking to hedge global inflation risks and take advantage of returns that inflation dynamics offer,” according to a spokesperson. The new fund is designed to avoid “traditional inflation hedges, which may be limited in scope, and may be limiting in a multi-speed world.”

The firm does not refer to any specific traditional inflation hedges, but some market participants criticize the most common inflation fighter– TIPS (Treasury Inflation Protection Securities) as an ineffective as a solo combatant. Until maturity, holders of TIPS do not realize capital.

The PIMCO Inflation Response Multi-Asset Fund hopes to be more dynamic. It combines the firm’s signature real return expertise and risk factor approach to active asset allocation.

“We believe that investors should always be prepared for the risk of rising inflation. In fact, although commodity prices have eased lately, we see them continuing to rise over the next few years,” said Worah.

The PIMCO Inflation Response Multi-Asset Fund hedges against inflation by investing in a range of assets that protect against different types of rising inflation: TIPS, commodities, emerging market currencies, real estate investment trusts and gold.

“Traditional inflation hedges often don’t provide an effective response to the wide-ranging drivers of inflation,” said Worah. “The PIMCO Inflation Response Multi-Asset Fund takes a comprehensive approach to arm investors with key inflation-sensitive assets and PIMCO’s real return expertise helps us determine how much of each asset to buy in any given environment.”

In addition to asset allocation, the fund will incorporate tail risk hedging strategies, intended to limit the impact of severe market shocks.

Such strategies are designed to protect against downside risk while positioning inflation-related assets to benefit from inflation dynamics.

Related articles