Counterbalance Funds from Young

03/19/2004 12:00 am EST


Richard Young

Editor, Young's Intelligence Report

Richard Young's newsletter is aptly named Intelligence Report.He is one of the smartest advisors around, offering conservative advice for building a portfolio for the years ahead. Here are three counterbalance funds to protect against potential future inflation.

"Robert Arnott may not be a household name and perhaps may not be familiar to you. He is the editor of the prestigious Financial Analysts Journal and chairman of Research Affiliates, LLC, the manager of more than $13 billion for institutions. Now you can invest with Arnott, as Research Affiliates has been hired as the asset allocation sub-advisor for PIMCO All Asset Fund. (PAALX). This is a 'fund of funds' that uses a dynamic asset allocation process to invest in the institutional class shares of the underlying PIMCO funds. This fund is an ideal portfolio counter-balancer. Over the coming year, I look to build a significant position in All Asset. One of the funds in Arnott's PIMCO universe, Commodity Real Return, is, for me, key to the overall concept; it employs commodity-linked derivative instruments backed primarily by a portfolio of inflation-indexed securities. This provides a double real response to inflation rates and changes in inflation.

"You also want to own Vanguard Inflation-Protected Securities Fund (VIPIX), as I do. The fund invests at least 80% of its assets in inflation-indexed bonds issued by the US government, its agencies, and corporations. Its dollar-weighted average maturity ranges between seven and 20 years. Remember, this fund's quarterly income distributions are likely to fluctuate considerably more than those of a typical bond fund. The fund's expense ratio is 0.20%, which is one-fourth that of the average one- to five-year government mutual fund. Unlike a conventional bond, whose issuer makes regular fixed interest payments and repays the face value of the bond at maturity, an inflation-indexed security provides principal and interest payments adjusted over time to reflect inflation. In the event of deflation or a drop in prices, the US Treasury has guaranteed that it will repay at least the original face value. As a result, investors in TIPS take no deflation or inflation risk and no credit risk or stock market risk.

"If you have not as yet taken a significant position in T. Rowe Price New Era Fund (PRNEX), I'd like you to get started. The industrial economy in the US, as well as worldwide, is building up a head of steam. Investors are going to be surprised at just how strong the industrial sector of the economy is going to get. Demand for energy, energy services, and metals is going to be powerful. New Era is an energy and metals behemoth. It is your frontline warrior for worldwide industrial development. And New Era is an inflation hedge as well as a hedge for the next energy crisis. All in all, it's a fund you can't afford not to own. I opened my position in this fund back in 1972. I bought New Era over 30 years ago as an inflation hedge. I wanted a long-term counterbalancer against rising prices. Now, over three decades later, I'm as happy with New Era as the day I began. I'm adding to my position. And over the three decades, I've never sold a share."

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