Alone, inflation residing at four-decade highs is problematic for advisors and investors. Throw in the fact that many traditional inflation hedges aren’t delivering the goods this year, and the soaring Consumer Price Index (CPI) is all the more painful.
One possible benefit of some of those hedges struggling this year is that the door is ajar to attractive, longer-ranging opportunities. Real estate could be a prime example of that scenario, indicating that exchange traded funds such as the Goldman Sachs Future Real Estate and Infrastructure Equity ETF (GREI) are still worthy of consideration.
GREI is an actively managed fund — a trait that should not be overlooked in this environment. In fact, investors may want to consider embracing it.
“Equity investors must also prepare for the risk that central bank tightening pushes major economies into recession. We believe this calls for an active approach that can zero in on companies with pricing power. Active managers can identify companies most likely to benefit from current conditions and avoid those that are most vulnerable,” according to Goldman Sachs Asset Management (GSAM).
Indeed, pricing power is part of the allure of real estate equities. In contracts with tenants, many real estate investment trusts (REITs) have escalators tied to inflation. However, that trend isn’t uniform across the industry, indicating there are benefits to active management because GREI’s managers can seek out the more attractive opportunities among REITs with positive correlations to inflation.
“Real estate, for instance, has historically provided a strong inflation hedge since rents typically rise when overall prices do,” added GSAM. “But real estate markets today are not monolithic and opportunities in residential, office space, and warehouses to support the logistics of ecommerce operations vary across regions and countries. This heightens the importance of experienced managers with the ability to analyze the operating performance potential of each asset and its ability to underwrite each asset to be sure it can service its debt.”
The point about debt servicing is highly relevant, particularly as rising interest rates make heavily indebted companies less attractive to investors. That’s another point underscoring the benefits of GREI’s status as an actively managed ETF. It can avoid REITs with treacherous debt burdens, which is meaningful because those firms could subject investors to negative dividend action and credit downgrades.
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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.