Keepin' it real: Inflation risk as an asset allocation problem
In a world of low yields and slow growth, inflation fears appear to have eased. But that doesn't mean the need for managing inflation risk has passed. Regardless of one’s views on where inflation is heading, the most appropriate framework for addressing inflation risk is one that incorporates it as an ever-present risk—not a one-off shock.
In its paper, Keepin' it Real: Inflation risk as an asset allocation problem, J.P. Morgan Asset Management's Global Multi-Asset Group (GMAG) examines how diversification can be an essential tool as inflation moves through various cycles.
- Individual assets behave differently depending on the inflationary environment and, as a result, offer investors varying degrees of protection.
- Inflation risks must be understood in the context of the broader business cycle. The state of the economy can often be a key driver in the discussion around inflation risk. Inflation can affect investors and portfolios in many ways. Those with shorter time horizons or more regimented liquidity needs tend to be exposed to inflation to a greater degree than other longer term investors.
- The right diversified mix of assets is vital and can help deliver a premium over inflation with greater consistency than a more narrow and concentrated approach.
Ultimately, the GMAG Research and Analytics Team found that assessing the degree to which inflation is a risk is the first consideration for investors concerned about inflation. From there, they provide a framework for thinking about managing that risk in a portfolio construction context with a goal of achieving real returns regardless of the inflationary and economic environments.