How to fight inflation with absolute return

By Denise Nakamura on April 05, 2011

After a lengthy and notable absence, inflationary signals showed up in the U.S. economy earlier this year, triggering worries that interest rates may eventually increase as well. Future higher inflation is a concern because of the burgeoning national debt, billions of dollars of spent stimulus, and the Federal Reserve’s longstanding policy of maintaining a near zero-interest rate policy.

While inflation may not yet be cause for alarm — and some is actually necessary for economic growth — investors should be aware of its impact. Inflation rates in the United States today are still fairly benign but it is important to note that inflationary pressures can build over time, as Michael J. Atkin, Director of Sovereign Research at Putnam, wrote in a recent Manager Insight.

Experienced investors understand that inflation can have a corrosive effect on the buying power of a portfolio’s returns, reducing the post-inflation, or “real,” return.

An absolute return allocation may help mitigate this phenomenon by specifically targeting securities or strategies that may be poised to perform well in periods of increasing inflation or rising interest rates. Managers have the flexibility to “go anywhere” and use modern investment tools, such as commodities, REITs, currencies, and derivatives contracts, as they seek out returns.

Putnam Absolute Return 100 Fund seeks a positive return that exceeds the rate of inflation, as reflected by Treasury bills, by 1% over a period of three years, regardless of market conditions. The fund is not tied to a benchmark and seeks to provide a positive risk-adjusted return with lower volatility than securities markets.

See performance of Putnam Absolute Return Funds vs. Treasury bills

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