How Can FlexShares Help Clients in an Inflation Scenario?

Posted by FlexShares on May 15, 2017 8:34:55 AM

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In periods of anticipated growth and inflation, we recommend investors:

  • understand the drivers of inflation
  • devote adequate attention to long-term planning
  • consider innovative choices for asset allocation

Broader diversification in longer-term scenarios increases chances for portfolio resistance. We invite investors to consider some core strategies for long-term inflation hedging.

Indexing Inflation

Treasury Inflation Protected Securities (TIPS) are designed as inflation hedging tools. In fact, the par value, coupon payment, and principal repayment of TIPS are indexed to inflation. Investors can, accordingly, use TIPS to hedge against actual and expected inflation. TIPS also have very low correlation (i.e. linkage or dependency) to other asset classes.

TIPS investing, in conjunction with common stock and other fixed income securities, thus holds the potential for a real yield independent of inflation. The key is finding a cost-effective method for targeting the duration (or price sensitivity to interest rates) of investments to match the risk exposure of your portfolio. FlexShares offers solutions to help investors navigate this challenge.

Adopting a Global Perspective

A U.S.-centric approach may limit opportunities for portfolio growth. Yes, the U.S. still ranks as the biggest contributor to the global economy, at roughly 24% of gross world product1. That figure, however, also means the majority of the economic action is outside the nation's borders. We believe it is possible to spread interest rate risk across multiple economies.

When thinking about how to accomplish this goal, consider two areas of economic activity that we believe are essential to the future of the global economy:

Upstream Natural Resources: This category includes materials needed to sustain productivity: energy, food products, metals, and other natural resources such as paper and water. As economies grow, there could be an increased, ongoing demand for these resources.

Infrastructure Assets: We believe that governments are relying more often on privatization to renew and build assets that move the people, goods, and services that grow economies. Our analysis shows that these tangible assets, such as transportation centers, bridges, and data towers, tend to offer investors intrinsic value, predictable expenditures, and stable cash flows.

Planning for Opportunities

We encourage investors to assess carefully their financial goals in the context of their personal timeline. An extended horizon, even during times of uncertainty, can potentially deliver opportunities to hedge inflation and capitalize on growth.

FlexShares wants to help investors, whatever their portfolio goals, stay informed and make better investment decisions. Learn more in the report "Expectations for Inflation: Scenario Planning with FlexShares."

  1. Source: The World Bank, World Development Indicators (2015). Structure of Output [Table]. Retrieved from http://wdi.worldbank.org/table/4.2(29 March 2017)

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FlexShares Morningstar® Global Upstream Natural Resources Index Fund (GUNR) is subject to the global natural resource industry. As the demand for or prices of natural resources increase, the Fund's equity investment generally would be expected to also increase. Conversely, declines in demand for or prices of natural resources generally would be expected to cause declines in value of such equity securities. Such declines may occur quickly and without warning and may negatively impact your investment in the Fund.

The Morningstar® Global Upstream Natural Resources Index is the intellectual property (including registered trademarks) of Morningstar® and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Morningstar® and its Licensors and neither of the Licensors shall have any liability with respect thereto.

FlexShares STOXX® Global Broad Infrastructure Index Fund (NFRA) is subject to infrastructure-related companies risk and MLP risk. Risks associated with infrastructure-related companies include: realized revenue volume may be significantly lower than projected and/or there will be costs overruns; infrastructure project sponsors will alter their terms making a project no longer economical; macroeconomic factors such as low gross domestic product ("GDP") growth or high nominal interest rates will raise the average cost of infrastructure funding; government regulation may affect rates charged to infrastructure customers; government budgetary constraints will impact infrastructure projects; and special tariffs will be imposed.

The STOXX® Global Infrastructure Index is the intellectual property (including registered trademarks) of STOXX® Limited, Zurich, Switzerland and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by STOXX® and its Licensors and neither of the Licensors shall have any liability with respect thereto.

FlexShares iBoxx® 3-Year Target Duration TIPS Fund (TDTT) and the FlexShares iBoxx® 5-Year Target Duration TIPS Index Fund (TDTF) may invest in derivative instruments. Changes in the value of the derivative may not correlate with the underlying asset, rate or index and the Funds could lose more than the principal amount invested. The Funds are subject to fluctuation of yield risk, income risk, inflation protected security risk and interest rate/maturity risk. The Funds are non-diversified meaning the Funds’ performance may depend on the performance of a small number of issuers because the Funds may invest a large percentage of its assets in securities issued by or representing a small number of issuers.

The iBoxx® 3-Year Target Duration TIPS Index and iBoxx® 5-Year Target Duration TIPS Index are the intellectual property (including registered trademarks) of Markit iBoxx® and/or its licensors ("Licensors"), which is used under license. The securities based on the Index are in no way sponsored, endorsed, sold or promoted by Markit iBoxx® and its Licensors and neither of the Licensors shall have any liability with respect thereto.

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