So far in 2016, investors looking for capital preservation, income or predictable returns have contended with substantial risks of inflation and rising interest rates.
There’s always another way.
Strategists with Atlanta-based Invesco believe that alternative investments can hedge against inflation and interest rate fluctuations while still delivering returns consistent with client goals.
“One of the things we always show advisors and clients is the historical performance of alternatives,” says Walter Davis, an Invesco alternative investment strategist. “They tend to perform with equity-like returns but lower levels of volatility and downside. If you look, alts have historically lagged equities in periods of strong performance, and outperformed in weak periods of equity performance.”
Davis believes that beta-neutral, global macro and equity long-short strategies can accomplish the same ends as traditional fixed-income and equity products without exposing investors to the same level of volatility.
Jason Bloom, Invesco Powershares’s director of alternative and commodity research, says that the time is right for commodities to offer a better hedge against inflation risk than Treasury Inflation-Protected Securities, or TIPS.
“Commodity prices are a significant part of inflation,” Bloom says. “For TIPS, the [consumer price index] is part of their return calculation, but they’re highly sensitive to the interest rate environment, too. The bond-like properties of TIPS can overwhelm the inflation hedge-like characteristics.”
Market-neutral money market mutual funds offer investors access to capital protection with reduced risk, Davis says.
Invesco offers two primary market-neutral options for investors. One is the traditional, low-yield money market mutual fund. The other, Invesco’s All Cap Market Neutral Fund, offers potentially double-digit annual returns, says Davis, but also carries twice the volatility of bonds.
“Actively managed money market funds bring something totally different to the table,” Davis says. “If an investor goes to cash, they’re basically getting zero or worse. If you look at our more aggressive market mutual fund, we can give you negative correlation to stocks. We can give you half the volatility, but still generate returns of high single digits to low double digits with principal protection. It’s the best of all worlds.”