Alternative investments for periods of inflation

With inflation at its highest in decades and interest rates set to rise, Michael Sager, executive director, multi-asset and currency management at CIBC Asset Management, said there are opportunities in alternative investments. 

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“We have to see alternatives as a large set of complementary investment solutions,” Sager said. 

For clients to achieve long-term investment objectives, Sager said he focuses on equity risk because historically, “equity has been the main source of financial wealth creation,” and he predicts that will continue.

However, Sager said it also makes sense to embrace other asset classes that can diversify equity risk and “smooth out some of the impact of periodic market volatility, such as we’re seeing now.”

Alternatives can play a role, but it’s a very broad descriptor with multiple investment solutions. It’s important to find an alternative strategy that fits a specific investment objective, he said.

If the objective is to protect portfolios from inflation and rising interest rates, Sager likes absolute return strategies because they are “very flexible solutions and very different from traditional investment solutions.”

A traditional 60/40 balanced portfolio is long on investments and closely linked to an underlying benchmark index, so performance tends to follow equity markets.

Conversely, absolute return strategies are not tied to underlying benchmarks.

“They can take long positions, but they can also take short positions,” said Sager. “And that means that they can expect to generate a very different return profile.”

Absolute return strategies also incorporate a wider set of asset classes than a traditional portfolio, Sager said, including currencies and commodities in addition to equities and bonds.

“That’s really useful when you think about the need to protect portfolios from inflation and rising rates,” he said.

For example, when interest rates are rising, he might short bonds and look to add exposure to commodities.

At the end of the day, Sager said it’s important to understand an investor’s specific investment objectives while making sure the portfolio is still diversified.

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.