Inflation may be easing. Maybe not. But what’s not debatable is that recent readings of the Consumer Price Index (CPI) remain at multi-decade highs and are elevated enough to suggest that material declines could take a while to appear.
With that in mind, it’s an ideal time for advisors and investors to evaluate asset classes and strategies with inflation-fighting reputations. The world of alternative investments makes it easier to accomplish those objectives.
At a time when gold, which is usually a prime inflation-beating destination, is faltering due to rising interest rates, market participants may want to consider other ideas in the alternatives space. Another idea to consider is the implementation of active management, which is often potent with alternatives and can potentially produce better outcomes for investors in inflationary environments.
On that note, real estate investment trusts (REITs) and the Virtus Duff & Phelps Global Real Estate Securities (VGISX) are ideas for investors seeking inflation protection to consider.
“In its various forms, real estate historically has provided a hedge against inflation and rising interest rates. Since 1972, for example, REITs have delivered attractive returns in a wide range of inflationary environments. REITs can offset increased costs by pushing rents higher as demand for space grows. In periods of moderate inflation, REIT dividends more than compensated for the higher price returns on traditional stocks, while in periods of high inflation, strong income returns offset falling REIT prices,” according to Virtus research.
REITs have pricing power, and many of their long-term contractions with tenants feature inflation escalators, which further enhance the inflation-fighting potency of this asset class.
Good news, investors: There are other inflation-thumping ideas in the alternatives realm, and those include merger arbitrage. The Merger Fund (MERIX) makes that strategy accessible to everyday investors.
“Merger arbitrage index returns historically have been better during periods of inflation. One reason: higher inflation tends to lead to higher rates, and higher rates tend to increase the merger arbitrage spread,” added Virtus.
With VGISX and MERIX, investors don’t have to fear inflation. They can even thrive during these trying times.
“Remember that inflation is far from a stable figure. Just because it’s high now doesn’t mean it’s going to be this way forever. It could drop dramatically next year. The important thing is to stay calm and stay invested. Above-average inflation has never been permanent. Prepare, don’t predict,” concluded Virtus.
For more news, information, and strategy, visit the Alternatives Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.