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A Solid Hedge Against Inflation

Principal Diversified Real Asset provides exposure to asset classes that have shown a high sensitivity to inflation.

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Bobby Blue: Even though inflation has remained tepid for the decade post-financial crisis, protection against inflation surprises is something prudent investors may seek out in their portfolios. Principal Diversified Real Asset fund offers these investors a thoughtfully constructed option that provides exposure to asset classes that have historically shown a high sensitivity to inflation.

Commodities like timber, metal, oil, and even water appear in the portfolio. These are useful to fend off inflation surprises; the price of these assets often shoots up considerably after a big CPI beat. Longer-term inflationary hedges like infrastructure and real estate receive allocations, too. These assets can be volatile in the short term--often exhibiting equity-like volatility--but over the long term they tend to correlate nicely to inflation. Currency, floating rate debt, and TIPS make up a real return bucket, which, while having a lower sensitivity to inflation than commodities, moves in line with interest rates and offers low volatility. The fund has long-term weights for each asset class, but the managers will often tweak allocations based on their view of the macro environment. 

Bobby Blue does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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