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T. Rowe Price Real Assets PRAFX

edited October 2012 in Fund Discussions
David, just not sure the juice is worth the squeeze for this inflation hedge fund.

Losing 25% of your wealth in four months is a considerable amount of downside exposure for a fund that's trying to protect you...

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  • edited October 2012
    These sorts of funds are going to be volatile, given the nature of the underlying sectors - they are not trying to protect you from downside. The intent is to protect you, over time, from rising costs/inflation and the idea that these sorts of sectors would likely fare best in a high inflation environment.

    Personally, I think it's good to have some exposure to these areas, but I also very much like hard, productive (and especially strategic) assets - key infrastructure (oil pipelines, etc.) Things like Enbridge Income Fund (EBGUF.PK), Brookfield Infrastructure (BIP), etc that pay significant dividends. I think a lot of infrastructure funds will also fare well in an inflationary environment, and many will provide a nice dividend yield along the way. TOLLX and AIFRX (although the latter is problematic in terms of getting in and rather problematic in terms of the fund company) are options. There are also CEFs and other infrastructure funds, as well.

    ________

    Cohen and Steers Real Assets Z (RAPZX) vs PRAFX since RAPZX started in May. The Cohen and Steers fund is a multi-manager fund with Cohen and Steers handling RE, Investec handling global nat resources stocks and Gresham handling an actively managed commodity futures sleeve. Additionally, Cohen and Steers handles a fourth part of the portfolio: "May invest up to 20% of the portfolio in diversifiers for added stability, including gold and fixed income in multiple currencies"

    Yes, yes, the expense ratio on the Cohen and Steers fund is higher. However, just showing a somewhat differently structured fund in the same category. Investec does not have any mutual funds (in this country), they appear to be largely an institutional manager.

    Cohen & Steers (global real estate securities, gold, fixed income): Cohen & Steers pioneered the field of public real estate securities investing in 1986 and features the industry’s largest global investment team dedicated to real estate, with $29.5 billion in real estate securities AUM as of 12/31/2011. The firm utilizes an integrated relative-value investment process that seeks to identify securities that in their view are mispriced relative to a company’s net asset value and projected future cash flows.

    Investec Asset Management (global natural resource equities): Founded in 1991, Investec uses proprietary commodity price forecasts derived from supply-demand analysis; $5.8 billion in commodities and natural resource equities AUM as of 12/31/2011. Their investment process combines fundamental commodity market analysis with a disciplined equity research framework.

    Gresham Investment Management LLC (commodities): Founded in 1992, Gresham has $12.7 billion in commodities AUM as of 9/30/2011. The company invests through long-only, fully collateralized commodity futures and swaps. Their proprietary process for managing rollover enables opportunistic short- and long-term positions.

    http://finance.yahoo.com/echarts?s=PRAFX+Interactive#symbol=prafx;range=20120510,20121004;compare=rapzx;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;
  • Charles, this fund is NOT "trying to protect you". This is CPI+ fund -- real asset exposure. When there is deflation expectation, it is going to plunge. If you believe in a long-term inflation, then you should have real asset allocation at least for a portion of your portfolio. People seem to have forgotten what 'long-term' is. if inflation expectations are sky-high (and so are nominal treasury yields), this fund will perform very handsomely. But this would be NOT the time to buy it.
  • Hi, Charles.

    As the others have noted, this is not designed to be a low-volatility safe haven. It's a global stock fund with an asset allocation that's designed to excel in high and rising inflation rate environments, but it's still a stock fund. Price notes that it will probably trail other global funds in environments with low and falling inflation (say 2% and under). In environments in the 3-4% range, it has neither a structural advantage nor a disadvantage. In environments of 5% and up, it's got a strong structural advantage.

    You classify this as an inflation-protected stock fund but you can also find inflation-protected balanced funds (mostly load-bearing) and inflation-protected income funds. If you're looking for something less volatile, one of those might be prudent possibilities despite their lowered long-term return prospects.

    For what it's worth,

    David
  • edited October 2012
    It's instructive to check the fund's benchmark(s). Here I flunk the DD test - though did check for one I've long owned, QRAAX. Found they use the GSG (Goldman Sachs Commodities Index). Based on that, it's still a slacker - but not as bad as it at first appeared. That particular index hasn't done much in recent years. Have very little in these type funds. Been gradually scaling back over the years, partially for the reasons you cite, Charles. (They'd be darned handy, however, if you're a good market timer.)
  • scott, fundalarm, David, hank.

    "These sorts of funds are going to be volatile, given the nature of the underlying sectors - they are not trying to protect you from downside. The intent is to protect you, over time, from rising costs/inflation and the idea that these sorts of sectors would likely fare best in a high inflation environment."

    "This fund is NOT "trying to protect you". This is CPI+ fund -- real asset exposure. When there is deflation expectation, it is going to plunge. If you believe in a long-term inflation, then you should have real asset allocation at least for a portion of your portfolio. People seem to have forgotten what 'long-term' is." (People like me...)

    "This is not designed to be a low-volatility safe haven. It's a global stock fund with an asset allocation that's designed to excel in high and rising inflation rate environments, but it's still a stock fund."

    "They'd be darned handy, however, if you're a good market timer." (Ha! Definitely not me...I'm timing challenged.)

    Sorry for being slow, I think I get it now.

    Thanks guys, Charles
  • edited October 2012
    "Sorry for being slow, I think I get it now."

    No no, it was a good question. I think a fund like this is not a bad thing to have to some degree, but you have to be aware of its potential volatility and keep it to a level in your portfolio that you can be comfortable with. Pimco's more balanced Multi-Asset Inflation fund may be a somewhat less volatile option. There are others as well, the Pimco fund is just the first thing that came to mind this early in the AM.

    Also, as another element of this, I think the other thing that I feel is that, in a high inflation environment, these stocks may not always do well vs the commodities themselves. Oil may do well, for example, in that environment, but an oil company may run into a thousand different issues.

    That's not saying that one should go into a commodity futures fund instead, but just that individual commodity stocks, for a thousand different reasons, may not always follow the underlying.

  • In general, these kinds of funds have disappointed and under-performed per expectations. But that is the problem...what SHOULD an investor's expectation be when buying one of these funds? And, more importantly, if one is convinced that higher inflation and higher real-asset prices are in the future, what should the strategy be? I really believe that most investors would be better served using something like PAUDX (PAUIX), where the manager has a free rein to own whatever he wants in whatever combination he thinks is prudent at the time.

    The alternative is to make a bet on one or more sectors like a commodity fund, or a multi-asset fund that is primarily real estate or inflation assets or something else. The ability to invest in these sectors at the "right" time is darned near impossible. We have tried this approach, with little success. Face it, even the great King Gross has been wrong a lot the last few years. What has saved him in many respects is the ability of his fund(s) to use derivatives that have - so far - enhanced his returns. But most of us DID think interest rates would be much higher than they are now. And most of us thought inflation would be in the 5-6% range by now (including Gross and many other great managers). But the sluggish pace of the economy put the brakes on all of that. Eventually that all will happen, as will much higher commodity and other real asset prices.

    An interesting commentary by Jeremy Siegel this week about people buying TIPS, which at current prices lock them into negative 9% returns over ten years, with no yield in the interim. Of course, when inflation really does rear its head, this will change, but it's gonna take a long time. In the meantime, it may be wise to let Rob Arnott and other very smart people make these decisions for you. Just FWIW.
  • Reply to @BobC: BobC makes an excellent, more low-key suggestion with Pimco All Asset/All Authority, whose goal is CPI + 6.5% over a market cycle. "With its dynamic asset allocation approach, the fund targets solid real (after-inflation) returns from a global opportunity set of traditional and alternative asset classes. For long-term investors, the fund targets solid real returns; its secondary benchmark is CPI + 6.5% over a full market cycle. The portfolio has the flexibility to draw on a wide selection of PIMCO funds, investing in inflation-hedging assets, such as Treasury Inflation-Protected Securities (TIPS) and commodities, as well as U.S. and international stocks and bonds, and may seek additional growth potential from the controlled use of leverage."

    http://investments.pimco.com/Products/pages/283.aspx
  • edited October 2012
    Reply to @Charles: LOL I thought you meant your reply was slow in coming. No - You'll find plenty of adherents for these in all their variations. Don't follow them enough to tell you what the better ones are. I bought QRAAX nearly out of the gate 15+ years ago. Also have some PRAFX. Just under 6% combined. Five years ago about 8% was so allocated. One thing for sure, when they start to run, plenty of $$ will flow in and they'll enjoy a very nice ride. As others note, the real assets group varies widely in how structured. Some like QRAAX actually play in the commodities arena via derivatives. Others like PRAFX primarily hold equities. Being a pie chart type, I think a "smigin" has its place in someone's mix. In my case there's the issue of creeping age (shorter time horizons), so that's one of the reasons have been scaling back in favor of more stable alternatives.
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