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Aug. 2, 2021, 3:07 p.m. EDT

These 3 tactics can help investors withstand inflation uncertainty, Janus Henderson says

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By Vivien Lou Chen

There are a few mistakes investors are making in their portfolios amid lingering concerns about U.S. inflation, says Adam Hetts, global head of portfolio construction and strategy at Janus Henderson Investors.

While market indicators are suggesting that price pressures won’t last , the unprecedented nature of the pandemic-era economy has investors wanting to upend entire asset allocations — with simple “knee-jerk reactions” such as buying into Treasury inflation-protected securities, or TIPS, the commodities sector, and more U.S. equities, he said in a phone interview with MarketWatch.Instead, Hetts identifies at least three tactics that could help investors withstand the uncertainty, and maybe even thrive, regardless of how long recent high U.S. inflation readings continue to persist. He says the approaches can be implemented to not only combat inflation, but address a backdrop of low U.S. rates, tight credit spreads, and pockets of lofty stock valuations.“Our take on inflation is that — whether it’s structural or transitory — at the very least, this is going to be structurally transitory, and this is not going away anytime soon,” said Hetts, whose London-based firm managed more than $427.6 billion as of June. “Inflation is just one risk in people’s portfolios. The biggest risk is asset allocations: the gaps and concentrations in them.” A quarterly survey by UBS Group found that 57% of U.S. investors with at least $1 million of assets to invest think that inflation will accelerate over the next 12 months—a higher share than any other region. Many plan to buy stocks and boost cash, while citing bonds, precious metals and real estate as other areas they intend to increase.Hetts, who is based in Denver, spoke ahead of the release of his team’s midyear outlook this week.

Value or growth? Both?

Investors, generally, are too overweight U.S. equities, particularly in the technology and growth sectors, he said. They ought to be “re-examining their home biases to equities, and trading against a broader recovery,” Hetts said.

Small-cap value stocks have produced more than double the returns of large-cap growth stocks since last November, according to Janus Henderson’s outlook, citing data from Morningstar Inc. The S&P Small Cap 600 Index /zigman2/quotes/210599868/delayed SML +0.85% , for instance, has trounced, the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.47% , by percentage gains over the past year. But it’s “short-sighted to think only in terms of growth/value,” and better to consider which trends and market themes have a chance to endure long term — by “looking down in cap size for opportunities and across sectors,” according to a draft of the report.

60/40 bonds?

Too many investors are passive in their fixed-income investments and “need to be broadly diversified and active,” Hetts said in the interview. By the same token, just because rates are currently low doesn’t mean the bond side of the traditional 60/40 portfolio “is dead”—but that it doesn’t necessarily require a 40% bond allocation to protect one from the downside in stocks.

Switching into “fixed-income multisector strategies could be a first step,” he said. “And there are still a lot of high-quality fixed-income categories—like securitized mortgage-backed securities; floating rate collateralized loan obligations, which offer attractive yield for little duration; and the entire bond sphere outside the U.S.–to diversify interest-rate and inflation exposure.”Hetts comments came amid a relentless rally in Treasurys, with the 10-year yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +0.28% briefly skidding below 1.15% on Monday.

REIT hygiene

Finally, Janus Henderson found that 80% of the adviser models it tracks in its databases weren’t allocated to REITS, which he says is the “diversification triple crown.”

REITs not only survive and thrive during periods of high inflation and rising growth, but they are a reliable source of income in a low-rate world and offer a break from the technology and growth sectors, he say. Hetts says an optimal allocation level for REITs would be 10% of one’s equity portfolio. By percentage gains, the FTSE NAREIT Equity REITS Index XX:FNERXXXX +0.25% has nearly matched the S&P 500 index for the past year.

Adding such a sector “is just basic portfolio hygiene at the level of washing one’s hands and not touching a face,” he said. It helps build “a well-diversified, resilient portfolio.”

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