It’s one of the biggest questions bedevilling investors today: how to deal with inflation, and whether to do so actively or passively. Last month, Investment Magazine partnered with QIC Global Fixed Interest to bring together some of Australia’s leading investment minds to tackle that very question. Present at the discussion were:

SEAN HENAGHAN,
investment director – multi-manager and investment solutions at AMP Capital Investors; JOHN COOMBE, executive director and head of consulting – Sydney, at JANA Investment Advisers; SUSAN BUCKLEY, managing director of QIC Global Fixed Interest; DON RUSSELL, chairman, NSW State Super and investment committee chair at LUCRF Super; KRISTIAN FOK, deputy managing director, senior consultant and actuary, Frontier Investment Consulting; JEFF ROGERS, CIO at ipac Securities; JON GLASS, CIO at Media Super; GRAHAM HARMAN, director of capital markets research at Russell Investments; KIRSTINE SODERBERG, senior investment consultant, manager research at Towers Watson; GERARD PARLEVLIET, CIO at Commonwealth OSF; KEN PHOLSENA, investment analyst, Local Government Super; KENT WILKES, senior portfolio manager, global fixed interest at QIC; and SIMON MUMME, editor, Investment Magazine. SUSAN BUCKLEY conveyed early in the discussion that an increasing number of people – within and outside the investment industry – saw inflation on the horizon: We’re seeing more concern on the street about inflation than we’ve ever seen before. I’ve had more acquaintances ask me about the price of bananas in the last couple of days than ever before! I’m concerned for our clients over the next three to five years that they will have adequate protection from rising inflation. I see that we have great opportunity to build better solutions or portfolios to protect our clients in that sort of environment. So concern, yes; but I see the opportunity for us as well. The discussion turned to the role played by the US in rising inflation expectations. JOHN COOMBE: The US is doing everything opposite to what Europe’s doing. Europe has cut costs, raised taxes, and is trying to do the European thing and get their balance sheet under control.

The US is doing the complete opposite: trying to grow out of it, and hoping like hell that they don’t have deflation, but inflation which allows them to pay off the debt at some point in the future at a much lower cost to the underlying taxpayer. Now, it’s all well in theory, but we’ve never seen it work before. SEAN HENAGHAN: They have a lot of inflation-linked liabilities that are unfunded. JOHN COOMBE: Yeah. Assuming they don’t break the social contracts, it’s a black hole that’s getting bigger every day. Congress just seems to be living in a fantasy land where they think they can grow out of it. That’s the biggest worry to me because they could actually spiral and do a Japan. They could get it all wrong, and you could just spiral into a Japan, where you’ve spent the balance sheet, you’ve wasted the money, but you haven’t actually achieved what you wanted to achieve, which was stimulate growth and inflation at the same time. That would have vast consequences for all of us in terms of equity markets and bond markets. SIMON MUMME: So which portfolio solutions would be appropriate for a scenario like that? JON GLASS: I think we’re all in the dark, to some extent. We’ve all heard these grand statements that small-cap stocks will help you when inflation is high, that direct property will be good, and perhaps infrastructure. But I’ve never seen anyone back that with some really good convincing statistics. It’s not proven. KRISTIAN FOK: It also depends on the drivers of inflation. If we’re talking about commodities and food prices as the drivers, it is a very different portfolio to consider than if wage pressures were pushing inflation upwards. If you think about Australia as being a supplier of commodities and food, and its impact on our currency, you might find actually, for us, it’s not so bad because we actually get cheaper goods imported, and we have a far stronger ability to generate revenue through exports. So talking about inflation as one thing is, I think, probably a little bit too simple, and unfortunately that also makes it difficult to work out what should we do. KIRSTINE SODERBERG: You could have deflation in one country and inflation in another country, depending on those drivers.

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