InvestmentStrategyConsiderationsforInflation-Sensitive.pdfVIP

Investment Strategy Considerations for Inflation-Sensitive Investors February 2011 Investment Strategy Considerations for Inflation-Sensitive Investors Introduction Introduction The United States, along with many developed economies, ? Naysayers dismiss TIPS as a legitimate asset class has enjoyed relatively stable inflation during much of the primarily on the belief that Owners Equivalent Rent past two decades. However, the unprecedented fiscal and (OER) artificially distorts published CPI data, especially monetary response by governments globally (to combat the in periods of extreme house price volatility. In fact, even recent credit crisis) increases the potential for a return to an during the most recent housing crisis, this mis-pricing era of higher inflation. has largely corrected itself. This again supports TIPS as a The potential for higher inflation is a concern to investors for longer-term buy-and-hold strategy. (Pgs. 5/Appendix) two key reasons: Section 3: Increasing Expected Return and Risk General: History suggests that inflation experience can have ? For the vast majority of investors, the MRP will not meet an impact on asset class returns. Expectations for higher minimum return goals. Although a litany of potentially inflation therefore, or even increased uncertainty around higher returning asset classes/strategies exist, we limit future inflation, may be a cause for investors to revisit asset our analysis to investment strategies typically associated mix policy; and with a degree of inflation protection/linkage. (Pg. 6) The World is “Short” Inflation: The investment objective ? Nominal Bonds offer the potential for superior return for many investors, including defined benefit (DB) opportunities (versus TIPS) due to the greater availability plan sponsors, ot