Objective: aiming to provide capital growth by delivering a return in excess of UK RPI inflation
"Targeting strong real returns regardless of the economic environment, we combine dynamic asset allocation with built-in inflation protection."
Why Hermes Multi-Asset Inflation?
- Inflation is core: for us, inflation is more than a performance benchmark - our entire investment process is driven by the dynamics of inflation
- Traditional hedges can fall short: no single asset - from inflation-linked bonds to property, gold and equities - consistently protects against or outperforms inflation
- Growth with built-in inflation protection: aiming to protect and grow capital, we use a disciplined process to identify assets that can either match or outperform the current drivers of inflation, and invest dynamically amongst the two
- Not macro-call driven: Inflation-matching and enhancing assets are accessed through distinct but complementary techniques, providing diversification among assets and investment styles.
- A rare outcome: MAIF has a different 'sweet spot' than its peers: it performs best in inflationary environments regardless of economic conditions, unlike growth-dependent absolute and total-return strategies
It is a dynamic multi-asset growth strategy with built-in inflation protection, consists of two types of assets, matching and enhancing:
- Matching assets have a fundamental relationship with inflation and the ability to protect the real value of capital
- Enhancing assets have the ability to outperform inflation and generate capital growth.
By combining these two types of assets in one portfolio, we aim to generate annualised real returns of 3% above RPI across rolling three-year periods, with a relatively low tracking error to inflation. Our asset-allocation process is driven by a systematic assessment of the relationships between the assets in the portfolio and inflation. As such, RPI is more than a performance benchmark: it drives our entire investment process, from asset selection and portfolio construction to risk management.
"We are not attempting to forecast inflation or asset class returns but to establish the relationships between them, and invest accordingly."
Tommaso Mancuso, Head of Hermes Multi-Asset
Can any asset outpace inflation?
There is a trade-off between an asset's ability to match the trajectory of inflation or beat it. We divide our universe into assets that we believe can match inflation or exceed, and invest accordingly to achieve our targeted return.
But the relationship of assets with inflation is not stable and needs continual monitoring, and we rebalance our portfolio in response.
We first deconstruct the UK RPI Index to identify its drivers. From a global universe of indices and assets, we identify underlying assets and risk factors with the most potential to either match or outperform current inflationary forces, and manage them in dedicated portfolios that employ distinct investment styles:
Inflation matching: We select a diverse range of assets based on the ability of their underlying risk factors to match the path of inflation. Typical examples include inflation-linked bonds, commodities, foreign currency and credit spreads.
Inflation enhancing: We select a range of assets whose underlying risk factors demonstrate strong potential to deliver inflation-beating returns. Such assets often include equities, government bonds and risk factors.
With the aim of protecting and growing capital, we manage these exposures dynamically in response to changes in inflation.
Targets cannot be guaranteed.