Institutional Investors Unfazed by Inflation

Allocation data for more than 2,500 asset owners suggest that pensions and other investors aren’t worried about rising prices.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Fears of inflation after rounds of Covid-19 stimulus are justified by the data: In July, the consumer price index rose 5.4 percent from the year before and 0.5 percent from June. Meanwhile prices of products like used cars soared to historical highs, outpacing the moderate wage hikes in some service industries like leisure and hospitality.

Yet institutional investors don’t seem too concerned. From June 2020 to June 2021, all U.S. investment plan types have increased their equity allocations, with most growing their stock portfolios by 2.6 to 5.8 percent, according to a new study from Investment Metrics analyzing more than 2,500 institutional portfolios.

Corporate defined benefit funds, public pension plans, endowments, and foundations all reduced their stakes in fixed income to fund their equity investments, Investment Metrics said.

“We think [the trend] has something to do with the apparent expectation that inflation is not really that big of a threat,” said Damian Handzy, head of research and applied analytics at Investment Metrics.

If investors expect higher inflation, they usually adopt a more defensive strategy that favors fixed income over equities, Handzy explained.

“Their actions are speaking the following language: inflation fears are overblown,” he said.

Rob Almeida, global investment strategist at MFS Investment Management, agrees that current inflation is more likely to be transitory than structural.

“Price inflation and wage inflation without commensurate or equal labor just become a tax,” Almeida told Institutional Investor. He thinks the effect of unemployment benefits and stimulus checks will wear off at the end of the year.

According to MFS’s latest survey of U.S. institutional investors, 81 percent are optimistic about the U.S. economy coming out of the pandemic.

“I fully appreciate the narrative that printing money leads to inflation, because that was the experience of the past,” Almeida said. “But this is not post-World War I Germany. This is not the 1970s where we have a shortage of oil. Each economic environment is different.”