The Performance of Inflation Correlated Assets: Reggie Middleton's Opinion

This is part 3 of my thoughts on investing in inflationary times (see Reggie Middleton's Take on Investing for Inflation: Part 1 and Reggie Middleton's Take on Investing for Inflation: Part II). I had my team run independent verification of inflation correlated asset performance, for it appears to me that many investors tend to simply follow what they have heard other say versus looking into what the facts are. In the process of the investigation, we have tracked the performance of asset classes discussed on my blog, including all maturities of treasury, inflation linked treasury, municipal bonds, residential mortgage, other metals and agricultural commodities. We have also computed nominal returns (based on a 255 trading day convention), real returns, asset volatility and Sharpe ratio for each the asset classes across time periods to determine performance of each asset class over a period of time. Below is the summary charts and tables of our findings. (Pro subscribers, please refer to the attached excel document for detailed information for each time period - Q2 2009 Asset Inflation Correlation Datasheet 2009-06-12 14:21:51 2.47 Mb)

Agriculture commodities: Historically, agricultural stocks have not provide sufficient hedge against inflation because of lack of storability and more or less constant demand (which is not linked directly to level of economic activity unlike other commodities). Also due to supply shocks agricultural commodities have one of the highest volatility (in terms of standard deviation) and lowest Sharpe ratio. In addition agriculture commodities have low correlation with inflation, negative real returns (in almost all sub-periods) and low nominal returns.

Emerging markets, real estate and Gold offer one of the highest real returns in that order. However, lower volatility of commercial real estate sector makes this sector one of the most attractive in terms of risk-reward ratio. Within commercial real estate apartments have one of the highest real returns (after emerging markets) and highest Sharpe ratio amongst all asset class.

Treasury yields have declined significantly over a period of time. Except during 1970's (during high inflation) treasury yields have declined over past 3 decades and currently are at an all time low (pls refer to chart below and suscribers may referenced the attached excel file). High inflation coupled with economic recovery could cause yields to increase.