Wealth managers brace for inflation
Financial advisers suggest balance of stocks, bonds to deal with economic change
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Rich Kirchen
The Business Journal of Milwaukee
Friday, May 14, 2010
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Inflation is coming — no one is sure exactly when or how boldly — but it’s not too early for individual investors to prepare for a more expensive future.
Southeast Wisconsin wealth management consultants don’t all agree on when inflation will hit, but they all see an end to the recent low-inflation environment. Predictions for the re-emergence of inflation range from as soon as the fall of 2011 to as late as the middle of 2015.
Regardless of when they believe inflation will hit, many consultants and advisers already are suggesting that clients adjust their allocation of stocks, bonds, cash and other investments.
“We think there’s going to be inflation,” said Jeff Geygan, president and senior portfolio manager for Milwaukee Private Wealth Management Inc., Mequon. “When and how much is unknown.”
The goal for investors, of course, will be to keep pace with, or outperform, increasing rates of inflation.
The rough performance of the stock market last week doesn’t mean investors should flee stocks for the relative safety of fixed income investments or bonds, experts said.
Last week’s “correction” wasn’t fun, but was not unusual during a market rebound, said Mark Mirsberger, CEO of Dana Investment Advisors, Brookfield. The stock market is still much higher than its March 9, 2009, bottom, he noted.
High-quality stocks — that is, stocks that are undervalued considering a company’s health and prospects — provide some diversification and risk reduction to bond portfolios in the face of inflation, Mirsberger said.
“Over longer periods of time, stocks have proven to generate higher real returns than both bonds and cash,” he said.
Bonds have provided protection and, in some cases, growth during the past two-plus years.
But when inflation hits, the main asset class that will be hurt is bonds carrying fixed interest rates that may fall below inflation rates.
As always, a balance of stocks and fixed income investments is a good idea to protect against volatility.
Individual investors need to position their investment portfolios for future growth and income needs, while considering the impact inflation may have on each asset class over time, said Marybeth Cottrill, managing director and senior trust officer at The PrivateBank in Milwaukee.
“We have been working with our clients to ‘soup up’ their cash management to protect against inflation yet be nimble enough to minimize principal loss in fixed income allocations as interest rates rise in the future,” Cottrill said.
Investors who buy bonds today need to make sure they are short to medium maturity so investors can exit the bonds in case of inflation, Mirsberger said.
“A 4 percent return might look good now, but you would lose money,” he said.
Buying bonds
Mirsberger and others recommend investors consider buying bonds that provide adjustable rates that rise with inflation.
Dana Investment has long promoted government-guaranteed adjustable-rate bonds. The bonds provide 2 percent interest now, but will increase with any hike in the Federal Reserve’s interest rates.
The securities are primarily issued by U.S. government agencies such as Ginnie Mae, Fannie Mae, Freddie Mac and the Small Business Administration.
Another type of bond that consultants are recommending as protection from inflation is Treasury Inflation-Protected Securities, or TIPS. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.
PrivateBank lists TIPS as one possible strategy, but is postponing the recommendation for now, Cottrill said.
“We would expect to allocate a portion of client bond portfolios to TIPS when we believe the threat of inflation is more acute,” she said.
Still another type of bond that performs well in an inflationary period is variable-rate coupons from corporations, Geygan said.
Another category of investments that can be a hedge against inflation over the long term is commodities or commodities-driven investments, said Jose Freyre, a financial planner with Monarch Wealth Management in Milwaukee.
While he is a skeptic on impending inflation overall, Mike Petersen, director of trust investment at Johnson Bank in Racine, does expect inflation to emerge for commodity prices. He agrees with other experts that investing in commodities and commodity-related funds is a smart strategy.
Investing in natural-resource funds is one way Johnson Bank hopes to post growth in what Petersen views as a below-average investment environment. The goal is to minimize volatility and protect principal in a so-called defensive approach.
“The idea right now is to try to get more consistent and defensive,” he said.
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