For all except die-hard deflationists, runaway price increases have seemed an imminent threat since central banks in the world’s major economies cut interest rates to near-zero during the credit crisis of 2008.
But even if you’re a believer in falling prices, it pays to be aware of how best to protect your assets in case your views are wrong.
Indexing inflation is therefore the central theme of our third issue of the Journal of Indexes Europe. There’s now a variety of ways for investors to inflation-proof their portfolios, either directly or indirectly, and in this late-summer Journal you can read about them in detail.
Inflation-indexed bonds have been a rapidly expanding sector of the world’s capital markets since the 1980s, and are now issued by both developed and emerging market governments. Inflation-linked derivatives have built on the foundations of the bond markets, and are now a crucial component of many pension funds’ and insurance companies’ portfolios. How these instruments work in practice is the subject of a detailed article from Brian Upbin, Anand Venkataraman and Scott Harman of Barclays Capital.
In our second article, Francis Gupta of Dow Jones Indexes takes things further, analysing the extent to which different asset classes, including inflation-linked bonds, have protected investors from inflation. Gupta analyses asset class returns, volatilities and correlations during the current century and comes to a surprising conclusion about the efficacy of hedges in different currency areas.
If share dividends had been largely forgotten by investors during the technology bubble, in recent years they have reacquired their historical significance. Now, however, you can trade—and invest in—dividends as an asset class that’s separate from the equities that generate them. Charles de Boissezon of Société Générale explains how and why this works, how an index investor can access European dividends, and why European dividends might currently present real value. Is this the best inflation hedge of all?
Finally, from inflation to costs. Vanguard has studied the effect of management fees and turnover levels on long-term performance. You get what you don’t pay for, concludes the firm—an unsurprising but easy-to-forget conclusion.
Although Invesco PowerShares’ (and native French speaker) Eric Geffroy won the first contest, last issue we had no winner of our prize crossword, suggesting that JoI Europe’s compiler and financial historian, Lizzie Lindsell, is getting the better of our readers. Can anyone fill in this issue’s inflation-themed puzzle correctly? Over to you.