More Inflation Fighting Weapons
September 14, 2009 by MJP
Filed under Investing for Retirement
All long term investors need core holdings that will protect against the damaging effects of inflation. Traditionally we have been told that equities in general are the answer to the inflation problem. Now we are not so sure. Based on this doubt, mutual fund companies continue to introduce new products specifically intended to provide inflation-protected growth.
The floating rate loan component of this fund is interesting and somewhat unique for a “real return” investment. The rates on these commercial loans adjust with prevailing interest rates, which should generally track inflation. The only problem is that most floating rate loans are made to borrowers considered to be higher risk.
The fund’s expense ratio is 0.73% and the return has been flat since its the fund was started in 2005.
A second fund intended to be an inflation-fighter is the Pimco All Asset fund (PASDX). This is a peculiar “fund of funds” product without a clearly defined asset allocation. Apparently, the fund managers run models to determine which of the various Pimco funds they should invest in and in what allocations. We don’t know what those models are, of course. Their stated goal in selecting funds and allocations is to beat the rate of inflation by five percentage points. (Don’t we wish that could be guaranteed.) The fund hasn’t quite achieved that goal but has returned 6.2% annually since 2003. The fund is expensive with a 1.45% expense ratio. That’s one of the big problems with managed funds.
If inflation-protected investing is a topic of interest to you (and it probably should be), check out these articles on investing in TIPS and couch potato portfolios. In the latter article, take note of the Permanent Portfolio fund (PRPFX).
Photo credit: unforth
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I think the last link in the article is incorrect. The link text is “couch potato portfolios” but the URL is http://gotoretirement.com/2009/08/new-options-investing-inflation-protected-securities/.
Am enjoying your blog very much – very helpful. Thank you.
Thanks for the information on the two “inflation” funds above.
I am recently retired from a career in the Insurance and Mutual Fund industry. I wouldn’t touch the above funds.
It seems that every time the Financial Services Industry gets creative with products or product design it becomes expensive for investors and/or blows up. This is probably because the products tend to be complex, not easily understood by salesmen, buyers or regulators, and are based on weak assumptions. e.g. gov+ funds, high yield bonds, CMO’s, Variable Annuities, Universal life, Ultra Short Term Bond funds, Auction Rate Securities, mortgage backed securities, Senior Loan Funds, vanishing premium life, etc. Look no further than major endowments like Harvard that put too much money in hedge funds. You could tell hedge funds would blow up – lots of rewards for short term gains, not regulated, no information on investments, little control on what investments can be made. A lot of smart people lost their shirt in hedge funds and have trouble getting out.
Investments can be really simple: Low cost (usually index funds), invested US large Cap,and foreign stocks, bonds (incl TIPS), some cash. I read the Boglehead’s Guide to Investments and other related books on Modern Portfolio Theory. It really changed my view of investments. The low cost doesn’t excite the financial services industry so they keep trying to come up with “better” ideas – better for who?