By Kathryn Mawer, CFA, CAIA Vice President / OCIO Advisor, FEG Investment Advisors
In the past inflation was expected to be approximately at the Federal Reserve’s target rate of 2%. And since the early 1980s, we have been close to that. But in October 2021, the consumer price index (CPI) leapt to 6.2%. The move raises a few critical questions:
- Will these high inflation levels persist?
- How can we protect the Community Foundation’s investments from inflation?
Will the high level of inflation persist?
Fund Evaluation Group (FEG) believes we will continue to experience inflationary pressure for the next 6-18 months. Some of the supply chain issues, which are a key contributor to inflation, should subside in 2022, and inflation levels should begin to fall. While we do not think we will immediately revert to the 2% Fed target, we expect inflation to fall within the 2-4% range.
How is FEG protecting the Community Foundation’s investments from inflation?
Several strategies can serve as reasonable inflation hedges, but chief among those are real assets and equities.
- Real assets, such as real estate and commodities, can further provide some defense against inflation. Within real estate, rents and values tend to increase with inflation. Similarly, commodity price increases are often part of the driver of higher inflation. Earlier this year, FEG doubled the portfolio’s exposure to real estate. Last year, FEG added an allocation to gold anticipating the need for an inflation hedge.
- Equities (stocks) are a reasonable hedge against inflation. Historically, stocks do well during low to moderate inflation (less than 5%), and only struggle during periods of high inflation (greater than 5%). Most of the Community Foundation’s investments are in Equities.
While helpful, neither of these strategies provides a perfect solution against inflation. The simplest and best defense to inflation is diversification, and the Community Foundation’s assets are highly diversified across a variety of asset classes.
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The Community Foundation prudently invests charitable funds so they may strengthen the community for current and future generations, carrying out our generous donors’ wishes to impact their communities and make a difference in the lives of others. Learn more about our investment strategy and meet our local volunteer Investment Committee.