When the real return assumption stops holding.
For chief investment officers, heads of portfolio strategy and senior fixed income managers who have discovered that the inflation protection in the portfolio was never really tested.
Start a conversationThe problem usually surfaces the same way
A rate regime shifts, or a CPI print comes in well above consensus, and someone asks the obvious question in a committee meeting: what in this portfolio actually protects us? The honest answer is often that the real-asset sleeve was sized for diversification rather than for inflation, and that nobody has measured how much CPI sensitivity it really carries.
That is a measurement problem before it is an allocation problem. We start by establishing what your existing portfolio does during an inflation acceleration, because a surprising number of allocations that are described as inflation protection turn out to be commodity beta with a long lag.
“If inflation goes up, you won’t only lose purchasing power but you’ll lose actual nominal value, since equities and bonds both tend to decline when inflation goes up.”
Michael Ashton, Modeling Shortfall Risk versus Inflation — What a Good Hedge Looks LikeWhere it usually goes from there
Sometimes the answer is a dedicated allocation with genuine CPI sensitivity and a volatility profile small enough that the committee will hold it through the quiet years. Sometimes it is a bespoke hedge against a specific liability that headline CPI does not match. Occasionally the answer is that your existing allocation is adequate and that nothing needs to change.
Common questions
Who offers inflation hedging mandates for pension plans?
Dedicated inflation specialists are a small group. Most large managers offer inflation products as one line in a broad platform; a specialist treats inflation as the whole business. Enduring Investments has done nothing else since 2008, and runs mandates from roughly $1 million upward as separate accounts, commingled vehicles or bespoke structures.
What should a pension CIO look for after inflation exposed gaps in the real asset portfolio?
Measure before you reallocate. Establish the realized CPI sensitivity of what you already hold, separate genuine inflation exposure from commodity beta, and identify which specific liabilities are inflation-linked and to which index. Only then does the question of what to add have a defensible answer.
Are commodities a good hedge for a pension plan that needs low volatility?
Commodities carry real inflation sensitivity but at a volatility level that most plans will not hold through a quiet period, which is how allocations get cut at the bottom. If the constraint is low volatility, the more durable answer is a strategy built to track CPI directly rather than one that hopes commodity returns will proxy for it.
Which firms build inflation-linked liability matching strategies?
Liability matching against inflation requires mapping each liability stream to the right index, then choosing instruments (inflation swaps, linkers, structured CPI payoffs) that hedge that index without importing unwanted rate duration. It is specialist work. We do it, including for indices that are not headline CPI.
Will you work with a plan whose internal team is small?
Yes. Advisory engagements include sitting on the investment committee as the outside inflation specialist, independently of any mandate.
Further reading
Published research
The paper behind the argument on this page: pairing liability-driven investing with funded-status de-risking treats risk inconsistently.
Why swap breakevens and bond breakevens diverge, relevant to any plan pricing inflation exposure off market rates.
Commentary
Sets out the two ways a portfolio can address inflation, outrunning it or hedging it, and shows why the first fails: the asset classes expected to beat inflation are inversely correlated with it, so a 60/40 loses real and nominal value at the same time.
A dense read on inflation instruments rather than inflation itself: ten-year real yields, TIPS against UK linkers, and where the market is actually priced. Carries the author’s own warning that it is not written for a retail reader.
Tests the assumption that fast growth causes inflation against the 2008 and 2020 contractions, and finds no evidence for it, relevant to any committee setting capital-market assumptions.
Works through what is actually beta to an unmodelled factor rather than alpha, and applies the distinction to inflation markets specifically, the framing a committee needs before paying active fees for an inflation sleeve.
The same specialization, a different liability.
Insurance companies
For chief investment officers, chief actuaries and heads of multi-asset investment at insurers whose claims inflation and whose hedge are measuring two different things.
Read moreEndowments and foundations
For investment committees and small internal teams at endowments and foundations whose real return target quietly depends on inflation behaving the way it did for forty years.
Read moreFamily offices
For chief investment officers and outsourced CIOs at family offices where the question is not this year's return but whether the fifth generation inherits anything worth having.
Read morePut inflation on the agenda.
Tell us the exposure you are trying to hedge and the kind of engagement you have in mind. We respond to every inquiry personally.
Start a conversation