Inflation. It feels like it’s all anyone is talking about -- and for good reason. Current inflation is higher than it has been in decades, and no matter who you are, it’s hard to escape its impact. The cause of the current inflation rate is due to a multitude of factors, including the global pandemic, supply chain constraints, the war in Ukraine and high commodity prices. Demand for goods and services continues to outpace supply and so, here we are dealing with the highest inflation rates we’ve seen since the early eighties.
Understandably, the current state of the market has investors concerned about how inflation will eat away at their investments, hard-earned savings, and impact their retirement income. Many investors are looking for useful strategies to help mitigate the effects of inflation. Luckily, we have a variety of products and investment solutions that can help to diversify investment portfolios and protect against the current inflationary environment.
Cash Alternatives - Earn more on your cash savings
A cash alternative is a short-term investment that can include high-interest savings accounts, guaranteed investment certificates (GIC), and money market mutual funds. A well-diversified portfolio includes a cash component to add liquidity and convenience. If you have a short-term goal that requires cash or a limited tolerance for market volatility, cash and cash substitutes can be a good choice. While cash is often seen as “risk-free” in that it isn’t subject to market volatility, in an inflationary market, there is risk involved.
Inflation risk refers to the potential loss of future purchasing power if the value of your investments doesn’t keep up with inflation. There are two ways to measure your investment returns:
- Nominal rate of return. Your investment return without considering inflation.
- Real rate of return. Your investment return minus inflation rate.
The real rate of return provides a more accurate account of actual purchasing power. With high inflation, it’s necessary to find investment opportunities that have the potential for higher income generation and capital appreciation. With a cash alternative, you are at least earning more than if your money is sitting in a checking account.
CI High Interest Savings Fund/ETF
CI High Interest Savings Fund, and CI High Interest Savings ETF (CSAV) offer two opportunities to earn more on your cash savings. Both funds invest primarily in high interest deposit accounts and allow you to benefit from a monthly income stream while preserving capital and liquidity.
The benefits of CI High Interest Savings Fund/ETF:
- Greater earning potential. Invested primarily in high interest savings accounts with an attractive yield of 4.22%1. Interest accrues daily and is paid monthly.
- Liquidity and convenience. Easy access to cash with no short-term trading restrictions. These funds are superior to guaranteed investment certificates (GICs) because there is no lock-up period, and it offers a much higher yield than redeemable GICs.
- Safety. The funds target an attractive yield while offering safety and security. The funds underlying investments are in high interest savings accounts at high quality, Schedule 1 Banks. The underlying rates are generally tied to bank prime rates, which are in turn tied to the Bank of Canada (BoC) overnight rate. This means that when the BoC raises rates, the gross yield on the funds will increase, all else equal.
Another way to capitalize on the volatile market is with a covered call strategy. A covered call strategy involves holding a long position in a stock and then selling, or writing, a call option on that asset to generate income. This can be a complex and time-consuming task. Fortunately, we offer a suite of covered call ETFs. The goal of the ETFs is to give investors targeted exposure to certain market segments including tech, energy, and health care to take advantage of volatility while also enhancing income yield.
Covered calls provide a degree of downside protection without having to forgo all gains.
The benefits of a covered call strategy include:
- Attractive income. The underlying stock can generate income from the option premiums and dividends.
- Degree of risk mitigation. The option premiums generated are able to provide a degree of protection against any potential price declines.
Opportunistic Sectors: Real Asset Investments
Real assets, including real estate and infrastructure, have a history of outperforming other asset classes during inflationary periods. This is because many real assets provide products and services that have inelastic demand. Regardless of how much the price goes up, consumers still need to purchase them, and they absorb the increase in price. Real assets also have a low correlation with other asset classes and make for a powerful diversifier. We are focused on real assets that are backed by tangible, cash-flow generating assets with long-duration contracts, visible cash flows and a strong business model with a high barrier to entry. We offer several real asset funds including CI Global REIT Fund and CI Global Infrastructure Fund.
CI Global REIT Fund
CI Global REIT Fund is a global portfolio investing primarily in real estate investment trusts, real estate operating companies and companies that provide services to the real estate industry. The Global REIT fund includes everything from single-family rentals to life science campuses, apartments and hotels and resorts.
CI Global Infrastructure Fund
CI Global Infrastructure Fund is a global strategy focused on cash-flow generating infrastructure assets with long-duration contracts, visible cash flows and strong businesses that control essential assets to a growing global economy. Infrastructure is focused on pipelines and energy, utilities, telecommunications and transportation
Benefits of investing in real assets:
- Enhanced portfolio income. Real assets such as real estate, can help offset the lack of income in traditional asset classes while helping generate safe and predictable income streams to help fund long-term income goals. Real assets offer the potential for steady, long-term cash flow through lease fees, rental fees, and royalty payments.
- Portfolio diversification. Real assets typically have low long-term correlations with traditional asset classes, making the fund a powerful diversifier.
- Reduce volatility. Assets like real estate and infrastructure typically have much lower drawdowns in down markets than broad equity indexes like the S&P/TSX Composite.
- Green investment opportunities. With CI Global Sustainable Infrastructure Fund, you can gain exposure to green investments.
- Growing institutional investor interest. Institutional investors including the Canada Pension Plan Investment Board (CPPIB) have steadily increased their allocation to real assets in recent years to capitalize on the sector’s inherent benefits.
With a historically low correlation to equities and bonds and a positive correlation with high inflation, commodities are another real asset that can act as a good hedge against inflation. Commodities include raw materials like oil, cotton, gold and coffee.
Over the last decade, there has been significant underinvestment in commodity supply due in part to declining investment in oil and gas and mining sectors. Yet, demand for commodities is expected to increase in the coming years as much of the world transitions to clean energy. This period of underinvestment in supply combined with the demand shock for clean energy has created ideal conditions for commodities as an asset class and a generational opportunity for investors.
CI Auspice Broad Commodity ETF (CCOM)
CI Auspice Broad Commodity ETF provides a convenient way to gain broad exposure to a portfolio of different commodity futures contracts including soybeans, corn, wheat, cotton, sugar, crude oil, natural gas, gasoline, heating oil, copper, gold and silver. The Auspice Broad Commodity ETF seeks to track the Auspice Broad Commodity Index, a rule-based index that attempts to capture upward trends in the commodity market while minimizing risk during downtrends.
Benefits of commodity investing:
- Hedge against inflation. Historically, commodity returns have been positively correlated with high inflation, including unexpected inflation.
- Diversification. Commodities typically have a low correlation to traditional asset classes.
- Potential returns. Commodities are one of the more volatile asset classes as they are affected by everything from weather to geo-political events and inflation. However, with great risk comes the potential for great reward.
Take control of your portfolio
Like most Canadians, you’re probably concerned about how inflation is impacting your bottom line. Luckily, there are strategies you can implement to try to mitigate the impact. Moving cash to a high interest savings account can help to minimize losses on a real return basis. You can also try to harness the current market volatility by adding covered call strategies to your portfolio. Finally, consider investing in opportunistic sectors like real estate, infrastructure and commodities to further diversify and hedge against inflation.
1. Gross yield as of October 27, 2022. Source: CI Global Asset Management, Bank of Canada, BMO, CIBC, National Bank and Scotiabank. High Interest Savings Account (HISA) and one-year GIC rates are represented by the equally-weighted HISA and GIC rates for RBC, TD, BMO, CIBC, Scotiabank, and National Bank. CSAV shown relative to some commonly used cash alternatives. This list is not exhaustive. Speak to your advisor