Inflation Protection

Zermelo’s Top 3 Papers on Inflation Protection Strategies

Inflation is top-of-mind for investors at the moment, as they try to digest the possible impact of the large growth...

April 15, 2021

Inflation is top-of-mind for investors at the moment, as they try to digest the possible impact of the large growth in central bank balance sheets and the huge stimulus packages that have been approved in response to Covid-19.

Inflation is difficult to predict, and it is even harder to predict the timing as there are possible differences in the short, medium and long term impacts.

However, one thing that seems more likely is that we could be entering a period where inflation is more volatile and the risks of higher inflation should be considered.

We reviewed the latest content from asset managers on this topic and have listed our three favourite papers below.

1. A New Playbook for Higher Inflation, BlackRock

In this paper BlackRock set out their current playbook for preparing for higher inflation.

The historical playbook is that higher inflation expectations feed into higher nominal yields. However, BlackRock believes the current playbook is that higher inflation expectations feed through less to nominal yields and more to lower real yields than the past. 

Therefore, approaching strategic asset allocation for a higher inflation regime is likely to be different than in the past. BlackRock has a preference for inflation-linked bonds over nominal developed market government bonds. 

BlackRock also maintains a higher allocation to equities than would be expected in a rising inflation, rising nominal yields environment.

2. Fire and Ice - Confronting the Twin Perils of Inflation and Deflation, AQR

In this article AQR explores the historical inflation sensitivities of a range of different investments, and the potential asset allocation response to the uncertain times ahead.

AQR approaches it differently to BlackRock and caution against overconfidence in taking a view on inflation in such an uncertain environment with potential twin risks of inflation or deflation.

AQR believes investors should instead consider the benefits of allocating to a truly risk-balanced portfolio and/or to dynamic, systematic directional strategies, to mitigate the tail risks of an unexpected outcome.

An allocation to such strategies may be preferable to the concentrated macro timing bet implied by a tactical shift in asset allocation to express a view on future inflation.

3. Anticipating inflation: historical and multi-asset perspectives, Invesco

In this report, Invesco explores the arguments underpinning both the “New Keynesian” and “Monetarist” views of inflation. They explain why they believe that the threat of inflation cannot be discounted – and, therefore, what investors might do about this.

Invesco believes that the answer lies in devising and implementing holistic strategies to meet the threats and opportunities that an inflationary environment might provide. 

This could involve designing an optimal mix of a broad range of assets – including real estate, infrastructure, commodities, equities and fixed income.


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Ed Studd

CEO, Zermelo

Ed is passionate about helping institutional investors meet their goals through better custom solutions. Prior to Zermelo, he gained extensive experience across asset management, investment banking and investment consulting.

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