For Dynamic’s Chief Investment Strategist Myles Zyblock, the recent surge in inflation we’ve seen in North America and across the globe is anything but a surprise. Years of extremely accommodative fiscal and monetary policy set the stage for higher inflation, and then the pandemic kicked that dynamic into overdrive. Demand surged while lockdowns and shutdowns constrained supply. What Fed officials originally deemed as “transitory” proved to be anything but. In September, the Fed, the Bank of Canada and the European Central Bank all hiked their rates 75 basis points, with promises of more to come. We recently sat down with Myles to get his perspective on the current inflationary environment and the need for dedicated – and diversified – inflation protection.
It’s been nearly four decades since we’ve seen inflation at these levels. Do you think policymakers will be able to get target inflation back to 2% or so, or is this the new normal?
Myles: Central banks were slow to react, and this allowed inflation to broaden and become more entrenched within the economy. I think it's quite possible that we might experience higher-than-average inflation rates than we've been accustomed to over the past few decades. This really is the context behind what we're dealing with today. I think it’s important for investors to be prepared for that reality.
Can the traditional 60/40 portfolio provide adequate inflation protection in the current environment?
Myles: I guess this year’s experience in particular might open our eyes to the fact that the traditional 60/40 mix could be an incomplete investment approach because both traditional stocks and bonds have struggled in 2022, and they've struggled in the face of greater inflation risk.
I'm not here to say that the traditional 60/40 mix is dead. I don't believe that, but I also feel that allowing for more tools in the portfolio toolbox better prepares an investor for a wider range of financial and economic outcomes in the future.
What other assets do you see as essential in providing inflation protection?
Myles: There’s a wide range of assets that can help protect against inflation – whether it’s physical commodities, real estate, inflation-protected bonds, infrastructure or other liquid alternative strategies, including options. However, not every inflation-protected asset outperformed inflation in every year. Those assets can also be quite volatile and, in any given year, they may or may not do what you expect them to do. Putting too many eggs into one inflation-protected asset can either make you or break you.
Pulling them together in a way that produces a less volatile return path through time is not an easy task for most people. That's why I think a diversified fund focused on inflation protection can offer people a really good head start in their portfolios.
Let’s talk for a moment specifically about Dynamic Diversified Inflation Focused Fund. What’s the fund’s approach to diversification?
Myles: The overall idea here is that the individual asset classes within the fund were constructed in a way that helps increase the diversification properties of the overall fund while maintaining inflation protection over time.
Dynamic Diversified Inflation Focused Fund is diversified across equities – including real estate, infrastructure, energy and materials – always keeping in mind the equity we are looking for is that which has been part of the inflation-protected universe over time. The same can be said for bonds, with a focus on real return bonds and high-quality corporates issued by companies that possess a pricing power advantage. There is also up to an allowable 10% direct exposure to precious metals and up to 10% exposure to alternatives. Again, every single choice that goes into this fund places inflationary considerations at the front line.
Strategic allocation
A target mix of assets that delivers a performance profile that is resilient during inflationary periods
Strategic allocation by asset class
Real Estate and Infrastructure
Fixed Income
Commodities
Alternatives
Strategic allocation by investment type
Equities
Bonds
Physical Commodities
Alternatives
Do you view this as a core holding – even if inflation subsides a bit?
Myles: Absolutely. To preserve your real wealth, you need to have some dedicated inflation protection or, at least, inherent inflation protection in your portfolio.
When's the last time we've had negative inflation? The point is that as long as inflation remains positive, even if it doesn't remain as high as it is today, inflation protection is still an important consideration. Even, in the days when inflation was 2%, it was still 2% a year. You had to make sure that whatever you own is compensating you for that inflation “tax.” Think of Dynamic Diversified Inflation Focused Fund as a core piece of your portfolio, which can help to preserve long-term wealth.
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