Building a portfolio for inflation risks and asset bubbles

CEO discusses how modern portfolios need to use all the levers available and why exposure to asset bubbles can be managed

Building a portfolio for inflation risks and asset bubbles

Having a modern portfolio that uses all the levers available will be crucial for investors negotiating an uncertain inflationary future or recurrent asset bubbles.

That’s the view of Barry McInerney, CEO of Mackenzie Investments, who told WP that when it comes to building a diversified, all-weather portfolio, reflation – or inflation – should factor in your thinking. It’s why, he added, institutional investors have always had a good portion of their portfolio in real assets, whether that be real estate, infrastructure or private debt, because they offer high-return opportunities and diversification.

Going forward, therefore, advisors should take advantage of the availability to access liquid or direct real assets like infrastructure, real estate, commodities, inflation-sensitive bonds, and even gold.

McInerney said: “That can be a bucket of your portfolio, which can be strategic in the long term as part of a modern portfolio that helps you to expand your return opportunities. Those particular types of asset can also provide you with that inflationary hedge.”

The inflationary picture will, of course, be influenced by central bank policy, liquidity that’s been pumped into the capital markets, and government fiscal support. The Federal Reserve, of course, recently revised its policy to an average target after failing to hit its 2% mark.

Whether these lead to inflation overshooting, McInerney said nobody really knows, although he recognized that the clear reflation potential will lead investors’ thinking. He said: “Will we get higher and higher inflation beyond target? We don't know. But it is a reminder for us that a more modern portfolio, pulling all the levers, will be needed in this new environment.”

On top of these considerations, asset bubbles are a concern. Whether that is driven by Reddit chatrooms, technological innovation or the hype around Bitcoin, McInerney told WP we can’t be naïve enough to think they won’t keep happening, mainly because they have occurred throughout the history of capital markets.

Whether they happen for social or scientific reasons, they are part of the conversation. What McInerney urged people to remember was that the prices are set through traditional supply and demand, and that just because people are looking for new exposures and bidding-up on stocks, that doesn’t mean that asset bubble is going to break down and be dismal forever.

He explained: “Look at Tesla, you might say it only owns 1% of the market share of the entire car manufacturing. But maybe the other way to look at it is, what’s its market share of just electric cars? And maybe the demand for electric cars in the stock is because of a long-term trend towards new energy conditions.”

That ultimately means more supply and a wide array of electric car choices by all the manufacturing supplies – and then there’ll be a better demand-supply balance.

“Sometimes, though, your demand-supply imbalances, and it's not because you got tulip mania but it does create valuations that are high. So, what should you do? You can have exposure to these areas but make sure it's part of a well-diversified portfolio. Therefore, you can take advantage of that upswing while understanding that until that financial balance corrects, you're going to have some real volatility.”