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Use of Natural Resource Funds as a Partial Inflation Hedge -- Do you use it?
Hello all. Just curious as to how many of you use a natural resource funds as a partial inflation hedge, and what percent of your total portfolio you allocate to such funds.
I don't hold an NR fund, my wife does in her Roth, about 5% total portfolio.
Thoughts on this and other inflation hedge strategies?
Equities over the very long term offer inflation protection, but as we all know this can be erratic. Limited natural resource-commodity holdings offer perhaps an extra degree of insurance. ---
Because of their higher volatility, my commitment is low: around 7%. (QRAAX & PRAFX). It had been around 10% - but after adding PRPFX last spring, I cut back. (PRPFX also holds gold & nat resources.)
I am certainly a believer in real assets, so I have a large amount in MLPs, infrastructure (BIP, for example) , real assets and commodity funds/stocks.
Reply to @hank: Hank, thanks. I thought it was generally the case that mild inflation is good for stocks, but that serious inflation is not (but is otherwise okay for NR funds).
Reply to @Shostakovich: I agree with your take on that. However, over very long terms (say 15-25 years) would expect everything to pretty much "iron-out".
I like PRNEX for NR and energy. I started buying in again this year because it is an inflation hedge, but especially since the price was around 30% off it's high. I figured this was a good time to get it cheap(er). I'm hoping over the next couple years it will make new highs.
I have about 4% in PRNEX and started a small holding in reits CSRSX as a hedge. Also hold ~5% in PRPFX like Hank mentioned. But it's a guess as to how that fund will hold up to inflation. It also holds a chunk of treasuries which likely won't do well. For that reason, I actually reduced my PRPFX holding from 15% to 5. Used the 10% from selling PRPFX to buy a diversified fund I've come to like even better, PGDPX.
Reply to @MikeM: Hi Mike. I like PRNEX which has been a good fund over the years. The longtime manager left (retitred?) couple years back. I was on the fence and mulling a switch after they launched PRAFX (at least the retail version) couple years ago. Finally sold PRNEX to buy PRAFX after reading in David's "disclosures" - August 1 Commentary - that he had done likewise. Maybe a case of monkey see ... monkey do Or, more appropriately: "Snowball Effect" (apologies to David). PRAFX looks like a little purer play on raw materials & decidedly heavier exposure to real estate. However, if wanting energy exposure, PRNEX has more of it. FWIW
Reply to @hank: Hello Hank. I've never taken the time to look at PRAFX, but I will. A quick look in M* shows an equal distribution between NR and real estate but also includes energy stocks. It maybe a better diversified inflation hedge then PRNEX. The real estate holdings have helped it have a better YTD return.
These funds are typically high beta funds that typically amplify the market movements. Natural Resources themselves are effected by the inflation but a lot of other factors do affect the resource stocks besides inflation. In fact, inflation might be a smaller component of the price movements of natural resource stocks.
Reply to @MikeM: Saw that. Don't have any thoughts on RE (REITs) as inflation hedges. Aren't many REITs small caps? Wife holds PRNEX at 5% of Roth as inflation hedge. Haven't really given PRAFX much thought. At one time, thought it was going to be able to invest directly in commodities, so it caught my eye. Actually thinking PRNEX might be a better play.
PRNEX might also have more international exposure than PRAFX.
Reply to @Shostakovich: The international piece is almost impossible to judge. On face, PRAFX has 50% more international than PRNEX (45 vs 30%). But that assumes that owning Exxon counts as 0% international. A better answer would include the source of the firm's earnings and operations, but I don't know how the efficiently gather that.
There's a load of data on the sub-components of the real-asset asset class. I'm trudging through it but would be happy to make these reports available to other masochists.
Reply to @Shostakovich: Hi Shostakovich. REITs are thought to be a good inflation hedge because rental costs and real estate value goes up with inflation. It's considered one of those 'hard assets' which tend to do well.
Sounds to me the TRP fund PRAFX would be a nice choice to capture the natural resource/commodities/reit - hard asset category. But I agree, PRNEX fits well here and has been my choice for a long time. I used to hear a lot about PSPFX on the old FundAlarm site. Good NR fund but quite a bit more volatile then PRNEX.
You can Google 'investing for inflation' and get a bunch of articles and suggestions. Here is one from Forbes for example.
Reply to @MikeM: Ya - generally speaking, just as houses are considered a good inflation hedge - but subject to huge downdrafts, like other investments I suppose. Tried to call bottom in '08 - '09 as Price's real estate fund (TRREX) was falling. Did all right long-run, but got bloody for a while.
TRREX (rounded): '08 Qtr 4: -39% & '09 QTR 1: -33% (Can't simply add the totals - since '09 loss came off a smaller base. My math suggests cumulative loss of 60% over two quarters).
Sure. I like both natural resources and any other 'real assets' as a hedge against inflation. Keep in mind that what is referred to as price inflation is in reality currency deflation, or devaluation, if you will. Indeed, if you compare various commodities and other stores of value and the various world currencies, you'll see that a barrel of oil is still worth the same as last year, but its 'price' being denominated in dollars has gone up.
There's all kinds of 'real stuff' that you can use as a hedge. Real estate, natural resources/commodities, pm's, equities, classic guitars or antique tractors. This category includes all your rare art and collectibles. Collectibles, however, does not include faddish things - beanie babies, etc. Ask Jay Leno about his cars.
Percentages? feh. I'm using something I read about 5 years ago where the elder Baron Rothschild said to protect your wealth, you needed to have 1/3 in securities 1/3 in real estate and 1/3 in rare art. Define rare art as you will. When I first ran my numbers I was 90/8/2. I was ill. I'm now about 60/25/15 and feel a lot better. I doubt I'll ever get to 33/33/33, but can still improve things.
As for your various portfolios and accounts, having 5-15% in natural resources/commodity funds is prudent and will help.
It may be a good idea to run Portfolio x-ray tool on all your funds. You may have sufficient allocation globally already. If you are using active managed funds, the managers you hired should be asking the same question you are seeking now.
Reply to @rono: Rono -- as far as "rare art and collectibles" go, I've been working on my wife to let me purchase an F.P. Journe. You think that would qualify? Can I cite you as a reference for this astute FP Journe strategy?
Actually, someone around here was stashing away rare and collectible watches. Get them with pm's and some bling and you're actually diversifying. I'll keep me old submariner bought on r&r in hongkong in '68 for $97 including taxes. teehehe.
Comments
Because of their higher volatility, my commitment is low: around 7%. (QRAAX & PRAFX). It had been around 10% - but after adding PRPFX last spring, I cut back. (PRPFX also holds gold & nat resources.)
Cheers.
D.S.
I have about 4% in PRNEX and started a small holding in reits CSRSX as a hedge. Also hold ~5% in PRPFX like Hank mentioned. But it's a guess as to how that fund will hold up to inflation. It also holds a chunk of treasuries which likely won't do well. For that reason, I actually reduced my PRPFX holding from 15% to 5. Used the 10% from selling PRPFX to buy a diversified fund I've come to like even better, PGDPX.
PRNEX might also have more international exposure than PRAFX.
There's a load of data on the sub-components of the real-asset asset class. I'm trudging through it but would be happy to make these reports available to other masochists.
David
Sounds to me the TRP fund PRAFX would be a nice choice to capture the natural resource/commodities/reit - hard asset category. But I agree, PRNEX fits well here and has been my choice for a long time. I used to hear a lot about PSPFX on the old FundAlarm site. Good NR fund but quite a bit more volatile then PRNEX.
You can Google 'investing for inflation' and get a bunch of articles and suggestions. Here is one from Forbes for example.
http://www.forbes.com/sites/baldwin/2011/03/01/seven-ways-to-beat-inflation/4/
TRREX (rounded): '08 Qtr 4: -39% & '09 QTR 1: -33% (Can't simply add the totals - since '09 loss came off a smaller base. My math suggests cumulative loss of 60% over two quarters).
Source- http://finance.yahoo.com/q/pm?s=trrex
Sure. I like both natural resources and any other 'real assets' as a hedge against inflation. Keep in mind that what is referred to as price inflation is in reality currency deflation, or devaluation, if you will. Indeed, if you compare various commodities and other stores of value and the various world currencies, you'll see that a barrel of oil is still worth the same as last year, but its 'price' being denominated in dollars has gone up.
There's all kinds of 'real stuff' that you can use as a hedge. Real estate, natural resources/commodities, pm's, equities, classic guitars or antique tractors. This category includes all your rare art and collectibles. Collectibles, however, does not include faddish things - beanie babies, etc. Ask Jay Leno about his cars.
Percentages? feh. I'm using something I read about 5 years ago where the elder Baron Rothschild said to protect your wealth, you needed to have 1/3 in securities 1/3 in real estate and 1/3 in rare art. Define rare art as you will. When I first ran my numbers I was 90/8/2. I was ill. I'm now about 60/25/15 and feel a lot better. I doubt I'll ever get to 33/33/33, but can still improve things.
As for your various portfolios and accounts, having 5-15% in natural resources/commodity funds is prudent and will help.
peace,
rono
Cheers.
Actually, someone around here was stashing away rare and collectible watches. Get them with pm's and some bling and you're actually diversifying. I'll keep me old submariner bought on r&r in hongkong in '68 for $97 including taxes.
take care,
rono