The Best Strategies for Inflationary Times

Abstract

Over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heightened inflation risk. In this article, the authors provide some insight by analyzing both passive and active strategies across a variety of asset classes for the United States, the United Kingdom, and Japan over the past 95 years. Unexpected inflation is bad news for traditional assets, such as bonds and equities, with local inflation having the greatest effect. Commodities have positive returns during inflation surges, but there is considerable variation within the commodity complex. Among the active strategies, the authors find that trend-following provides the most reliable protection during important inflation shocks. Active equity factor strategies also provide some degree of hedging ability. The authors also provide an analysis of alternative asset classes such as fine art and discuss the economic rationale for including cryptocurrencies as part of a strategy to protect against inflation.

TOPICS: Developed markets, financial crises and financial market history, risk management, portfolio management/multi-asset allocation

Key Findings

• ▪ The authors examine a range of passive and active strategies using a century of data in the United States, the United Kingdom, and Japan and find that passive equity and fixed-income strategies fare poorly during inflation surges.

• ▪ Commodities provide historical inflation protection, as do collectibles such as wine and fine art.

• ▪ Active strategies such as trend-following fare well during historical inflation surges, and equity factor strategies such as quality provide some protection.