TIPS tend to underperform in a rising rate environment, says Bloom, because their value drops, while commodity prices are relatively unaffected by interest rates.
“Going forwards, there’s a lot of risk we haven’t seen play out yet in extremely low-yielding fixed income,” Bloom says. “The rate environment has not reversed much. You can still wipe out a whole year’s worth of returns pretty fast in long-term bonds with a small uptick in interest rates.”
Commodities also provide better protection for global investors because they aren’t subject to fluctuations due to currency movements, says Bloom.
By failing to hedge fixed-income investments, advisors and investors can diminish or cancel out inflation protection, Bloom says.
“Currency movements are a risk to all asset classes, but especially fixed income,” Bloom says. “It’s only in the face of a massive currency move that you ever see commodity returns wiped out completely. In this low-yield environment, foreign securities yield 4 to 5 percent. If you get a 5 percent move in the currency, they’re gone for a while.”
As an added bonus, commodities bought at or near the bottom of the cycle also provide enhanced returns when held, Bloom says.
Bloom argues that it is better to invest in commodities, or commodity-tracking funds, rather than in related equities like gold miners or pipeline MLPs.
“There’s going to be more volatility in gold miners and other related equities than there is in the underlying commodities,” Bloom says. “If I’m long something like gold, I know what the likely outcome is going to be, but I’m not sure about the gold miners. I’ve heard from two major banks and even Moody’s that the valuations in energy equities are expecting a $65 barrel price of crude oil, and that might be overly optimistic. I have concerns about energy equities over the long term.”
With commodities and other alternative strategies, timing is important, says Davis.
“I’ve seen time and again that clients and advisors come into the asset class after it’s had its run and after it would have added value in the portfolio,” Davis says. “We’re encouraging people to be proactive in anticipation of the normalization of volatility.”