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The Best Strategies for Inflationary Times

Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey and Otto Van Hemert
The Journal of Portfolio Management August 2021, 47 (8) 8-37; DOI: https://doi.org/10.3905/jpm.2021.1.274
Henry Neville
is an analyst at Man-MSL in London, UK
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Teun Draaisma
is a portfolio manager at Man-MSL in London, UK
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Ben Funnell
is a portfolio manager at Man-MSL in London, UK
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Campbell R. Harvey
is a professor of finance at Duke University in Durham, NC, and a research associate at the National Bureau of Economic Research in Cambridge, MA
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Otto Van Hemert
is the director of Core Strategies at Man-AHL in London, UK
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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.

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The Journal of Portfolio Management: 47 (8)
The Journal of Portfolio Management
Vol. 47, Issue 8
August 2021
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The Best Strategies for Inflationary Times
Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, Otto Van Hemert
The Journal of Portfolio Management Jul 2021, 47 (8) 8-37; DOI: 10.3905/jpm.2021.1.274

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The Best Strategies for Inflationary Times
Henry Neville, Teun Draaisma, Ben Funnell, Campbell R. Harvey, Otto Van Hemert
The Journal of Portfolio Management Jul 2021, 47 (8) 8-37; DOI: 10.3905/jpm.2021.1.274
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  • Article
    • Abstract
    • WHY DOES INFLATION MATTER FOR ASSET PRICES?
    • DEFINING INFLATIONARY REGIMES
    • FINANCIAL ASSETS
    • HARD ASSETS
    • ACTIVE STRATEGIES
    • INTERNATIONAL INFLATION
    • STRUCTURAL CHANGE AND THE RISE OF CRYPTOCURRENCIES
    • CONCLUSIONS
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • APPENDIX C
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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