Last week, I discussed how to inflation-proof the fixed income portion of your investment portfolio. If you missed this column, go to www.welchgroup.com; then go to ‘Stewart’s Weekly Column’ under the “In the News’ heading. This week I want to continue this discussion on inflation-proofing your portfolio by focusing on the equity side of your portfolio.
Earlier this week Fed Chairman Alan Greenspan testified before Congress, expressing his views on the state of our economy. In his presentation, he continued to voice concern about inflation in the United States. His remarks, along with those of any number of respected analysts who are expecting a ho-hum stock market for 2005 provides plenty of incentive for investors to look around for non-traditional investment alternatives. Traditional equity style investments that may do well in an inflationary environment include real estate, commodities, and gold.
If you’re not familiar with investing in inflation fighting securities, you can choose a manager who specializes in making informed decisions in these areas. Rob Arnott has racked up an impressive track record and heads the PIMCO All-Asset fund (PASDX), along with co-manager Peter Bernstein. This fund is of a different breed as it actively moves among a range of alternative investments such as TIPS, commodities, real estate, and other PIMCO funds. These managers seek to identify those asset classes and sectors that offer the most value at a particular point in the economic/market cycle. For 2004, the fund produced a total return of 11.1%. The expense ratio is a moderate .86%.
Gold has long been thought of as a hedge against inflation but my research indicates that this is not a foolproof strategy. It appears that, historically, gold does very well during inflationary times only about 60% of the time. If you want to buy gold for your portfolio, consider an Exchange Traded Fund (ETF), newly available since last month. iShares Comex Gold Trust is designed to provide investors with a simple and cost effective method to gain exposure to the price of gold in an investment portfolio. The Trust is designed to reflect the day-to-day movement of the price of gold bullion, less trust expenses. Shares of the trust will be listed on the American Stock Exchange under the symbol "IAU”, and may be purchased and sold at market price as you would with any stock. The expense ratio on this ETF is .40%.
One of the more popular investment vehicles used as a hedge against inflation has been real estate. Here again, you may want to consider the advantages of using an ETF: tax efficiency; low cost of diversification; high liquidity; and excellent asset allocation properties due to their low correlation to the stock market. One of the best known ETFs in this arena is the iShares Cohen & Steers Realty Majors Index Fund, which has over $1.3 billion in assets and has a low expense ratio of .35%. In 2004, this investment was up 35.22%, along with a 21.12% return since the investment’s inception in January 29, 2001. However, investors may want to be somewhat cautious within this group. REITs have had tremendous runs over the past 5 years and there is some concern that real estate may now be overvalued.
For more information on either the iShare Gold Comex Trust or the Cohen & Steers Realty Majors Index, go to www.ishares.com and search under the symbol IAU and ICF.
The next couple of years may prove to be particularly challenging for investors. It’s important to note that Alan Greenspan is actively attempting to stem the tide of growing inflation. If he is successful, these inflation-hedging tools may prove to be ineffective. You should work closely with your financial advisor, keep a close eye on what is occurring on the inflation front and be prepared to adjust your portfolio, depending on how the economy moves.