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Fake Inflation Fighting Funds

edited September 2012 in Fund Discussions
I imagine with all the monetary stimulus being done by the FED that inflation may right around the corner. There may be a bunch of mutual funds that try to take advantage of the fear of inflation by offering protection / returns that move higher with inflation. I have discovered one fund that advertises itself as an inflation fighter but, clearly is not.

http://www.learnbonds.com/the-pimco-real-returns-commodity-strategy-fund-inflation-protection/

Comments

  • One may suppose that an investment vehicle that has growth over and above the "reported" CPI-U or whichever CPI one chooses to use, is inflation fighting.

    The author notes: "Labor costs, marketing and sales costs, and technology costs have become much more important than energy and raw materials."

    Part of this is true. Labor costs, particularly now; and from the continued intervention of technology should likely continue to be flat for the majority of the public not involved in professional positions for some years into the future.

    One point of value related to TIPS, and not noted by the author is that this investment sector is also subject to a safe haven investment area, of which, we have had more than the normal load during the past 4 years. Thus, the TIPS pricing has had a fairly smooth upward chart path from folks choosing some risk aversion from this particular gov't. issue; and the resulting negative 1.86% yield during the last, recent auction. Inflation fears going forward, in my opinion, is not the primary driver for pricing at this point in time for TIPS.

    As to Pimco's performance with the fund mentioned; one must suppose they got the investment holdings and timing wrong, regardless of Mr. Gross' hopes and wishes.

    Many hedge funds have and are having similar problems, eh?

    My inflation adjusted 2 cents worth.

    Regards,
    Catch
  • I own PCRDX. Since 2003 this fund has had its ups and downs...volatility was especially severe in 2009 when it tumbled as a result of ...well you remember.

    Since then the fund has doubled in value...not sure what your point is but, in a non-inflationary environment this fund has held up admirably.

    Since you seem to be taking this link you posted at face value...take a look at the facts.

    I would have preferred owning PCRAX (PCRDX) over VFINX over the entire last ten years. What's your alternative?

    image
  • edited September 2012
    Certainly, commodity prices are volatile. The fund is not going to move remotely in-line with the tweaked, manipulated and generally unrealistic CPI (again, commodity prices are volatile), nor is it going to move exactly in line with the index, given its intent to try and improve over the index. Additionally, Pimco's various stock or commodity index funds are not exactly "low-key" - see also the real estate index fund, which is really good if real estate is doing well, and really not if it isn't.

    The intent is to try and invest in commodities (and an actively managed portfolio of TIPS and various other bonds/derivatives) in an attempt to preserve purchasing power over the mid-to-long term. Over the last decade, as noted in the chart above, it has done that better than the S&P 500 did.

    Over the short-term, commodities will certainly have bad or off years. If one wants to preserve their purchasing power with some sort of long/short commodities fund where the intent is to gain every year and not be so volatile, well, there really isn't one. You could look into a managed futures fund, although when someone finds a good managed futures fund in a mutual fund format, let me know. So far, there definitely does not appear to be one.

    I guess I'm not getting the article. Did you want a fund that tries to track the CPI? That moves more closely with the underlying commodity index? If the former, you could go with Pimco All Asset All Authority, whose intent is CPI + 6.5% over a market cycle (that is that fund's stated goal.) If the latter, there are plenty of ETFs. However, with either route you've done better than inflation over the last decade or so. So... (shrugs)

    The only issue that I have is that the fund's distributions sometimes can verge on the ridiculous (there was one of 12% of the fund last Winter.)

    I've recently switched most of my holdings from the Pimco fund to the AQR fund, but still commodities, different strategy.
  • I used to hold PCRIX and I always viewed it as a commodities index fund. I suppose the advertising about inflation hedge might be a little excessive, but the fund is pretty clearly tracking the DJUBS commodities index and nothing more.

    I also thought PCRIX stayed fairly close to the DJUBS index. I'm not sure why the numbers in the article diverge so much. Maybe they are not using total return (PCRIX's distributions are substantial) or I just remember incorrectly. If you want a DJUBS index fund, I think PCRIX is still the closest you will get.

    Anyway, my point is that nobody should go into PCRIX expecting it to be anything more than a commodities fund. If commodities go up and PCRIX goes down, then something is wrong, but otherwise it's delivering as intended. There are other products like TIPS that are explicitly linked to inflation. For everything else, you just have more or less historical correlation with inflation and no guarantees going forward.
  • edited September 2012
    One excerpt touts the fund's "inflation-hedging potential." The other claims an "inflation-fighting strategy." Now, "potential" and "strategy" are much different from absolute predictions. Viewed that way, the managers aren't necessarily making erroneous claims. The CPI figures point to average inflation under 2% a year over the 5 years. How many investors would even hang around should the fund achieve that lackluster 1.82% "potential" annual return? ... In reality there's no such thing as an inflation-proof mutual fund. This arises, as has been said, from the unknowns concerning which consumer prices will rise the most at any one juncture. Few, if any, keep perfect pace with inflation. Corn prices depend in large measure on how much rain falls. Houses provided a nice inflation hedge for 30+ years until the bottom fell out. Gold collapsed in the '80's & '90's to $250 an ounce only to soar to near $1700 today. Ya just never know - and that's why fund managers resort to words like "potential" and "strategy" in their promotional materials. (Heck, I'm a "potential" Olympic gold metal winner in the 100 meter sprint:-) Does this diminish the usefulness of the funds to investors? I think not. Above all it seems to me you want a nice mix of funds which don't all behave in the same way. With their links to a broad array of commodity prices, these funds do offer some protection of sorts from seeing your whole basket of investments tumble at the same time.

    Added note - Some may say diversification didn't work in 2008 because commodities fell even harder than equities. First, the underlying fear at the time was "deflation" which is bad for both equities & commodities. In an envisioned "inflationary spiral", that would not be the case, and commodities should outperform. Secondly, diversification did help in 2008 if one also held bonds.
  • Reply to @bee:
    I cannot paste a capture using jing here bee or many other places like emails. Anything I must do? But here's a link.
    http://screencast.com/t/2JtNbofVo
  • The price movements of this fund definitely includes inflation component but other factors do influence the returns to a higher degree. I would not use it for inflation purpose. It could be a supporting actor for portfolio diversification in smaller percentages.
  • beebee
    edited September 2012
    Reply to @ron:

    Hi ron,

    I ran into the same issue.

    The solution is to create a new button in JING that has "embedded code" as its format option. You only have to create this button once and it will then be available anytime you capture an image.
    First, capture an image then follow the three steps outlined in the image below. At step three select "embedded code" which allows your capture to be embedded as code in the discussion (it will show up as a bunch of html code when you link it using (Ctrl+V). Complete your discussion by posting and then go back and look at it. It should be incorporated as an image, not a link to an image. Also, realize that you now have two buttons for linking...that, in my case, look the same...so, be careful which you choose depending on whether you want a URL link or embedded code. Hope that helps.

    By the way, I do like your chart of PRPFX...another good fund in my estimation.

    image
  • Lots of great points:

    1) I am not saying the fund does not produce great absolute returns. To be honest, I believe the fund outperformed the average commodity fund. However, I do not remember how the fund performed on a risk-adjusted basis. Many PIMCO funds have more higher higher than average volatility.

    2) Why does the funds combine "TIPS" and "Commodities" in the same portfolio? Most investors believe both commodities and TIPS have inflation fighting properties. Then the fund uses inflation fighting language to promote the fund. The question addressed in the article "Does this fund hedge inflation?" not should you own a commodity fund or is this a well managed-fund.

    Let me put this question back to you: Should allocate a portion of your portfolio to a commodity fund?
  • Has anyone thought about the AQR Balanced Commodity Fund?
  • Actually, i like this concept. Pimco uses futures to get exposure to UBS commodity index. This is as close to passive as you get, with some benefits. 1. They actively manage rolls (futures need to roll monthly or quarterly) as to minimize that contango/backwardation pricing differentiation, and 2. They swap collateral not into cash, but into TIPs -- thus receiving positive carry (since interest on cash/bills is non-existent). I, personally, find it much more predictable than Highbridge fund, for example, which makes active bets (like long gold) and times its exits and entry -- sometimes unsuccessfully (just like the rest of us). This makes HB fund's performance difficult to predict. For full disclosure, I had a small investment in HB fund and closed it for the stated reason. I have never invested in the Pimco fund, but would probably consider if i wanted diversified commodity exposure.
  • Reply to @Heathbob: Own it - have switched from PCRRX.
  • Reply to @BondInvestor: This fund is not holding TIPS just for fun. It is primarily buying Commodity Futures and for futures it must hold a collateral. The collateral is Typically invested in Treasury Bills. This fund is using TIPS instead trying to add to the return. Instead of TIPS it could have been any acceptable collateral but PIMCO thinks that can actively manage this portion and earn excess returns.
  • edited September 2012
    Reply to @Investor: Good point. No fund manager wants to feed hogs or stockpile petro. They own the commodities on paper in the futures market. Apparently with great leverage, because it leaves them $$ invested in bonds for earning extra interest for investors. That's how my quack fund QRAAX works too.
  • edited September 2012
    Reply to @BondInvestor: I like this topic. Thanks for throwing it out there. On one point, must say that a major objective of all these companies is selling their funds and raking in $$ for the Mother Load. So, the vast assortment of funds to some degrees is designed with that goal in mind. Think of it as an ice cream parlor adding more and more flavors, or an auto manufacturer having half dozen different models, each with 3 or 4 levels of trim. It sells. -

    As to your question "should (one) allocate a portion of your portfolio to a commodities fund?" Put that way (as a simple "yes" or "no" proposition) I'm inclined to say no - it's not an absolute necessity. So much depends on your situation and temperament. Maybe ya own some farm land or standing timber somewhere. Or collect rare art and coins. Or own half dozen rental units. Those are also good inflation hedges. ... Or, maybe you're 40+ years to retirement and don't have time or temperament to screw around with half dozen funds. And high fees make ya sick to your stomach. Throw some $$ in a low fee S&P index fund and the rest in an international index fund. I don't think you'll be disappointed 40 or 50 years out. Think of it this way: over time the value of the businesses you own will rise along with cost of living. If they own real estate, buildings, rails, timber, etc. that stuff will rise in value. So equities do offer some protection. -

    On the other hand, some like myself (1) have shorter time frames (I'm 66) and (2) enjoy tracking & allocating funds. So I have for 15 years kept a small % in commodities funds and also allocate to many other types ... Yep, it feels good, but can't honestly tell you it's helped my returns any - maybe just a bit due to frequent rebalancing. ... Been listening during a long drive today to a nice James Last orchestration of "Games that Lovers Play." Beautiful stuff ... so I'm tempted to put some of these niche funds into a category called: "Games that Investors Play." (-: FWIW - Sorry so long & take care.







  • Reply to @bee: I just got around to getting the embedded button and tried it by doing a capture of the discussion page. Here is what it looks like.

    image
  • Hi ron,

    A bit strange with whatever the Jing capture did with the display above.
    --- The HUGH salute shows "ducrow" started the discussion, which was started by me and indicates 766 views, which are for the discussion above regarding Pimco Income & Dividend. The Pimco discussion also shows started by me with only 3 comments; the last being me.
    I understand the problem for viewing, as the appearance is that a particular discussion and other data belongs together between the blue lines, which appear as dividers between the various discussions.

    Regards,
    Catch
  • Reply to @ron:

    Looks like you got it...nice job!
  • ron
    edited September 2012
    Reply to @bee: Still doesn't work on an email. Only the code shows.
  • Reply to @ron:

    For email I just use the hyperlink option.
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