Hedging around inflation
Self-managed superannuation fund (SMSF) investors need to increase the inflation protection within their portfolios, according to specialist inflation linked bond investment manager Ardea Investment Management.
Ardea principal Tamar Hamlyn said past experience supported including inflation linked bonds in fortress portfolios overweight in cash.
"It's very difficult for inflation to move from 2 per cent to 0 per cent, and extremely difficult for it to move below zero - but it's all too easy for inflation to increase to 5 per cent and beyond," he said.
Hamlyn claimed investors had paid insufficient attention to inflation risk and this was understandable when the consumer price index remained at less than 3 per cent a year.
"However, this overlooks the ease with which inflation can increase to uncomfortable levels, even over a five or 10-year investment horizon," he said.
Hamlyn claimed one of the common misconceptions held by investors about inflation was that cash represented a good hedge.
"While investors won't lose money on cash when inflation turns out to be higher than expected, the value of cash investments won't increase in value either - and the purchasing power of that cash will be reduced," he said.
Hamlyn claimed this posed significant issues for SMSF holders, who will be looking to their investments to provide income for real expenses.
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