Skip to main content

In a classic 60/40 portfolio, if an advisor considered allocating 10 per cent to inflation protection, 6 per cent of the equity allocation and 4 per cent of the bond portion should be placed into the inflation-focused fund, says a strategist.William_Potter/iStockPhoto / Getty Images

Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.

The topic of inflation and its impact on various asset classes is at the forefront of discussions between advisors and clients as the cost of living continues to surge and financial markets remain volatile.

Data show money has been piling into inflation-focused funds as advisors look to protect client portfolios from the eroding effects of high inflation.

The Investment Funds Institute of Canada (IFIC) reports sales of inflation-focused mutual funds have soared since October 2021. From January through September of 2021, inflation-focused mutual fund net sales averaged roughly $3-million a month, according to IFIC data. But in October 2021 alone, net sales of such funds totalled $105-million, and have since ranged from $12-million to as high as $180-million per month.

Mackenzie Investments is fresh off the launch of its new inflation-focused fund in September, which aims to diversify a portfolio by adding exposure to asset classes that are typically seen as less sensitive to inflation.

“What we have in this fund is not a prediction of inflation. It’s a positioning according to the inflation regime we’re in,” says Benoit Gervais, senior vice president, portfolio manager, and head of Mackenzie Investments’ resource team in Toronto.

“Most of the traditional funds – balanced funds that is – have been built to reflect asset performance over the past 30 or 40 years at a minimum. And as such, the assets are probably over-representing a long-term trend of declining inflation or inflation under control.”

As a result, most funds are likely exposed to long-duration fixed income, are underweight commodities and overweight growth equities, which are not ideal in a high-inflation environment, he says.

Mackenzie Inflation-Focused Fund’s targeted asset mix is 40 to 60 per cent equities, 40 to 60 per cent fixed income and 0 to 10 per cent commodities.

Mr. Gervais says the fund is meant to round out an existing portfolio.

“If you want to be protected from the chance that inflation stays high and persists higher, you want to have some of this mutual fund, which is low-to-medium risk,” he says. “It would be a good complement to all of the other balanced funds that are probably in the average Canadian’s portfolio.”

While inflation has begun to show early signs that it might have peaked, central bankers have warned their fight against rising prices is likely far from over.

There are three secular trends that will likely support higher inflation for longer, Mr. Gervais says – the impact of climate change, the trend of developed economies onshoring manufacturing supply chains, and the need for major infrastructure investments.

Fidelity Inflation-Focused Fund is also a “useful hedge, or if you will, insurance against inflation,” says David Wolf, portfolio manager and lead manager of the fund at Fidelity Investments Canada ULC in Toronto.

The fund launched almost a year ago and had $1.25-billion of assets under management as of Aug. 31.

When inflation first started increasing, “the narrative at the time was that inflation was transitory and nothing to worry about,” Mr. Wolf says. “We were a lot less sanguine.”

He and his team recognized how high inflation could present challenging market conditions for investors, so they opted to design a fund that would be resilient in that type of environment. Even if inflation eased, Mr. Wolf says the fund’s objective would generally remain unchanged.

Wealth ‘erosion’ should be a top priority

Myles Zyblock, chief investment strategist at Dynamic Funds in Toronto, says protecting clients’ long-term wealth from erosion due to inflation should be one of the top priorities in most multi-asset portfolios. He manages Dynamic Diversified Inflation Focused Fund, which has been in existence for more than 17 years. The fund is mainly composed of real estate and infrastructure assets, commodities and fixed income.

He says the fund has outperformed the Canadian inflation rate by about 4.5 per cent annually over its history.

In a classic 60/40 portfolio, if an advisor considered allocating 10 per cent to inflation protection, 6 per cent of the equity allocation and 4 per cent of the bond portion should be placed into the inflation-focused fund, he says.

Should inflation decline to the general central bank target of 2 per cent, that still represents a loss of purchasing power, Mr. Zyblock says.

At least “a portion of a portfolio should always be dedicated to protecting or enhancing one’s wealth in inflation-adjusted terms,” he adds.

For more from Globe Advisor, visit our homepage.