Institutional Investors Eye Commodities for Inflation Protection

August 15, 2022 — Boston

As the Fed struggles to wrangle inflation, the need for safe harbor asset protection is at a multiyear high

With much of the market reeling from the ongoing effects of inflation and volatility, the quest for safe investment harbors has intensified. Having fallen out of favor during times of dollar superiority and low inflation, there now may be an opportunity for strategic institutional allocations to commodities to make a resurgence, according to the latest Cerulli Edge—U.S. Institutional Edition.

Historically, commodities have been considered a safe bet during inflationary periods due to relatively high correlations with key inflationary metrics such as CPI and PCEPI (personal consumption expenditures price index). Given the most recent inflation readout of 8.5% (12 months, ending in July), sustained market volatility, and supply pressures, Cerulli expects commodities classified under the energy basket to provide asset owners the best protection against inflation. The positive relationship between inflation and energy appears well defined. “Market conditions may dictate an opportunity for institutional allocators to increase allocations to select commodities and/or commodity indexes, particularly those that prioritize energy,” states Jacob Conecoff, analyst. However, he recommends that managers proceed cautiously, as ESG requirements of some clients may restrict investment in fossil fuels, thus precluding some of the major commodity indexes.

The research also spotlights an increasing interest in cryptocurrency as an investment but finds that regulatory oversight continues to be a significant barrier to institutional entry into the asset class. Cerulli believes it will be some time before wider institutional adoption of cryptocurrency occurs. According to the research, only 20% of investment consultants indicate that their institutional clients have positions in cryptocurrency or adjacent investments. “While there is much debate about crypto having inflationary hedge characteristics similar to those of certain commodities, it has yet to be fully understood as an asset class, is highly speculative, and is not recommended by nearly all institutional asset managers and investment consultants at this time,” adds Conecoff.

With sudden and unexpected rises in the economy’s inflationary measures, asset owners are revisiting how sensitive their portfolios are to inflationary pressures. The current inflationary pressures cannot be compared easily to previous market regimes and need to be viewed with a renewed eye to the exact sources of risk they present. “Asset protection is as important now as it ever was,” says Conecoff. “Managers should consider looking to select commodities, namely those classified under the energy basket, for inflation protection and as a means of capital preservation,” he concludes.

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Note to editors

These findings and more are from The Cerulli Edge—U.S. Institutional Edition, 3Q 2022 Issue.

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