Practical Applications of The Best Strategies for Inflationary Times

Abstract

In The Best Strategies for Inflationary Times, from the August 2021 issue of The Journal of Portfolio Management, authors Henry Neville, Teun Draaisma, Ben Funnell (all of Man Group), Campbell R. Harvey (of Duke University), and Otto Van Hemert (also of Man Group) explore how investors can protect their portfolios from losses due to inflation. Today’s investors have little experience with inflation risk because inflation has been low for 30 years. The authors analyze 95 years of data and pinpoint eight periods when inflation rose above 5%. They then analyze which investment classes and strategies post the highest real returns (returns minus the inflation rate) during those times.

The authors find that dynamic trend-following strategies do best, posting average annualized real returns of 25%. Commodities are also strong, posting 14% real returns. Both had positive returns in all eight inflationary periods. Collectibles also did well, while TIPS held their value. Stocks and bonds posted major losses during high inflation when held passively, but they performed better in long/short factor strategies within equities. Portfolio managers may therefore wish to consider diversifying with trend-following, commodities, and certain long/short factor strategies as hedges against inflation risk.