Key takeaways:
• There is no risk-free way to consistently beat inflation but, now real yields on inflation-linked government bonds are positive in most developed markets, investors with a defined horizon have a better probability of doing so.
• Short-dated inflation-linked bonds offer the best chance of matching near-term inflation, in our view, if starting real yields are positive; longer maturities offer higher yields but may not match inflation in the short term.
• Equities, commodities and real estate can provide long-term inflation protection but can also be volatile over the short to medium term. There are no guarantees and an investor’s entry price will matter greatly.
• We think investors with a multi-year investment horizon can be hopeful of beating inflation based on current real yields, but to do so by more than 1% per annum requires accepting greater risk and uncertainty.
Investors wanting to protect their wealth in real (inflation-adjusted) terms over both an annual and multi-year horizon face an inevitably uncomfortable conclusion: there is no risk-free solution. The good news is that today, unlike five years ago, the real yields on inflation-linked government bonds are now in positive territory for most developed markets. Therefore, investors with a matched liability or a specified investment horizon can at least be almost certain of beating inflation over their chosen time frame. Bruising experience As the experience of the last few years demonstrates, inflation-beating returns are sometimes hard to come by when passively holding long-only market exposures. This can even be the case when the asset is explicitly linked to inflation, as holders of longer maturity inflation-linked bonds (linkers), property or infrastructure assets will attest.
US Treasury Inflation-Protected Securities (TIPS), US Treasuries and cash* vs. inflation, rebased.
