Let’s face it, portfolio return measurement is a big part of the investment management game we all play. While everyone’s return bogey tends to be a little different – some chase after the S&P 500 return, while others pursue returns based on fixed-income benchmarks like the Barclays Aggregate Bond Index – we all tend to take periodic stock of where we stand financially. It’s important, however, to always understand just what those return numbers mean – and what they don’t mean.
We all live in a world of nominal returns. Remember, however:
Nominal returns = Real returns + Inflation
During the spring of 1980, an investor could have bought a 10-year risk-free US Treasury note yielding better than 12% per annum! Inflation, however, as measured by the YoY change in the Consumer Price Index (CPI), came in at 14.8%. So, based on the simple formula above, that investor recognized a real return of -2.8%. They actually lost purchasing power even though their investment earned 12%!
Inflation is public enemy #1 for most fixed-income investors. Given the 35-year period of disinflation (disinflation is a declining rate of inflation) that we have experienced since the early ’80s, it’s understandable that many investors may simply ignore inflation measures today. However, it doesn’t take much of an increase in prices to wipe out the meager yields available in today’s market.
Having a hedge for fixed income portfolios seems to make a lot of sense to us at Nottingham Advisors. That’s where our Real Return strategy comes in. Designed and first implemented four years ago, this strategy has proven itself valuable in mitigating some of the ravagings effects that inflation can play on traditional fixed income portfolios.
The Nottingham Advisors Real Return strategy combines four distinct asset classes, each with a proven track record of generating real inflation-adjusted returns. These four asset classes – Equities, Commodities, Fixed Income & Alternatives – are equally weighted and rebalanced annually. The sub-sectors within each asset class are carefully monitored to ensure sufficient diversification and positive correlations with inflation.
Our equity allocation, utilizing liquid and low-cost exchange-traded funds (ETFs), emphasizes high-quality companies with along history of consistently growing their dividends. Along with dividend growth companies, we also focus on businesses in the infrastructure space. Industry centered around toll roads, utilities, and airports, to name a few, involve long-lived assets and a degree of pricing power that allows for incremental costs to be passed on to users of the assets.
Commodities have a long history of increasing in value during periods of rising inflation. Along with positions in gold and silver, we invest in companies involved in agribusiness as well as the energy space. Energy prices have historically made up a big component of CPI and companies involved in this space provide something of a natural hedge against higher energy prices.
The Real Return strategy’s Fixed Income allocation is comprised of adjustable-rate and inflation-protected ETFs. These contain securities that allow for future price adjustments based upon the published rate of inflation in the US economy, such as TIPS, as well as securities with variable or floating-rate coupons.
Lastly, we have an allocation to the so-called Alternative space that is may consist of real-estate ETFs, currency exposures, or other certain inflation-sensitive positions. These positions are monitored and adjusted over time, with all sectors subject to rebalancing annually.
For more information about Nottingham Advisors Real Return Strategy, please call our office.
Matthew Krajna, CFA
Co-Chief Investment Officer
Matthew joined Nottingham in 2012 and is a member of the Investment Policy Committee. He brings over 13 years of investment experience to the team. Matthew is responsible for conducting investment research, due diligence, and contributing to Nottingham Advisors overall investment strategy. Additionally, He is responsible for establishing the firm’s strategic and tactical asset allocations. Matthew works with investment advisors and both individual clients & institutions to help build customized investment solutions to fit their needs.
Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.
For more information about Nottingham’s offerings, visit www.nottinghamadvisors.com or call 716-633-3800.
Nottingham Advisors, LLC (“Nottingham”) is an SEC registered investment adviser located in Amherst, New York. Registration does not imply a certain level of skill or training. Nottingham and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Nottingham maintains clients. Nottingham may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. For information pertaining to the registration status of Nottingham, please contact Nottingham or refer to the Investment Advisor Public Disclosure Website (www.adviserinfo.sec.gov). Any subsequent, direct communication by Nottingham with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.
This newsletter is limited to the dissemination of general information pertaining to Nottingham’s investment advisory services. As such nothing herein should be construed as the provision of personalized investment advice. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Adhering to the assumptions, theories and principles serving the basis for the information contained herein should not be interpreted to provide a guarantee of future performance or a guarantee of achieving overall financial objectives. As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. Furthermore, this newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their dates. As such, there is no guarantee that the views and opinions expressed in this article will come to pass. This newsletter should not be construed to limit or otherwise restrict Nottingham’s investment decisions.
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