Inflation Sensitive Assets: Instruments and Strategies PDF
Preview Inflation Sensitive Assets: Instruments and Strategies
The real impacts of inflation and its most In Inflation-Sensitive Assets: Instruments and In Inflation extreme form – hyperinflation – are known Strategies, Stefania Perrucci and Brice Benaben fla only too well: they erode value, unbalance blend insights and experiences from market tio economies and destroy wealth. participants including investment bankers, n asset and pension fund managers and central S e Sensitive In the wake of the financial crisis a huge bankers to guide the reader through this n s monetary overhang threatens the major emerging sector. itiv developed economies. e This book, for the first time, addresses the a s The iron laws of economics have no respect commodities and inflation markets together, se assets for modern semantic niceties of “quantitative”, providing a holistic treatment from an inflation ts “credit” or “monetary” easing: these policies all perspective. portend of inflation that must work its way out of the system. Inflation-Sensitive Assets provides the reader with E a deep understanding of the drivers of inflation, d As a result markets have focused attention on the assets which can be used to hedge it and ite Instruments and Strategies d assets that protect the investor from loss of how investors can formulate strategies when b purchasing power. managing assets and liabilities in an inflation- y sensitive environment. S te Inflation-sensitive assets – including f a commodities, equities, infrastructure and real Designed for practitioners, the book includes n EdItEd by StEfanIa PErruccI estate investments, and inflation-linked securities important academic contributions, and will be ia and brIcE bEnabEn P – have in fact become a new asset class. of interest to portfolio managers, risk managers, e plan sponsors and researchers alike. rr u Many institutional investors controlling trillions c c of dollars’ worth of assets are allocating an “This book provides an essential resource for i a increasing weight to the sector as an alternative investors, consultants and service providers n d and complement to other traditional assets. keen to preserve wealth” b MIhIr WorAh, Managing Director, r head of real return Portfolio Management, ice PIMCo b e n a b e n PEFC Certified this book has been produced entirely from sustainable papers that are accredited as PEfc compliant. www.pefc.org Inflation_Sensitive_Assets.indd 1 12/07/2012 11:18 (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page i — #1 (cid:1) (cid:1) Inflation-Sensitive Assets (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page ii — #2 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page iii — #3 (cid:1) (cid:1) Inflation-Sensitive Assets Instruments and Strategies Edited by Stefania Perrucci and Brice Bénaben (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page iv — #4 (cid:1) (cid:1) PublishedbyRiskBooks,aDivisionofIncisiveMediaInvestmentsLtd IncisiveMedia 32–34BroadwickStreet LondonW1A2HG Tel:+44(0)2073169000 E-mail:[email protected] Sites:www.riskbooks.com www.incisivemedia.com ©2012IncisiveMedia ISBN978-1-906348-62-5 BritishLibraryCataloguinginPublicationData AcataloguerecordforthisbookisavailablefromtheBritishLibrary Publisher:NickCarver CommissioningEditor:SarahHastings EditorialDevelopment:JadeMitchell ManagingEditor:LewisO’Sullivan Designer:LisaLing Copy-editedandtypesetbyT&TProductionsLtd,London PrintedandboundintheUKbyBerfortsGroup Conditionsofsale Allrightsreserved.Nopartofthispublicationmaybereproducedinanymaterialformwhether byphotocopyingorstoringinanymediumbyelectronicmeanswhetherornottransiently orincidentallytosomeotheruseforthispublicationwithoutthepriorwrittenconsentof thecopyrightownerexceptinaccordancewiththeprovisionsoftheCopyright,Designsand PatentsAct1988orunderthetermsofalicenceissuedbytheCopyrightLicensingAgency LimitedofSaffronHouse,6–10KirbyStreet,LondonEC1N8TS,UK. Warning:thedoingofanyunauthorisedactinrelationtothisworkmayresultinbothcivil andcriminalliability. Everyefforthasbeenmadetoensuretheaccuracyofthetextatthetimeofpublication,this includeseffortstocontacteachauthortoensuretheaccuracyoftheirdetailsatpublication iscorrect.However,noresponsibilityforlossoccasionedtoanypersonactingorrefraining fromactingasaresultofthematerialcontainedinthispublicationwillbeacceptedbythe copyrightowner,theeditor,theauthorsorIncisiveMedia. Manyoftheproductnamescontainedinthispublicationareregisteredtrademarks,andRisk Bookshasmadeeveryefforttoprintthemwiththecapitalisationandpunctuationusedbythe trademarkowner.Forreasonsoftextualclarity,itisnotourhousestyletousesymbolssuch asTM,®,etc.However,theabsenceofsuchsymbolsshouldnotbetakentoindicateabsence oftrademarkprotection;anyonewishingtouseproductnamesinthepublicdomainshould firstclearsuchusewiththeproductowner. Whilebesteffortshavebeenintendedforthepreparationofthisbook,neitherthepublisher, theeditornoranyofthepotentiallyimplicitlyaffiliatedorganisationsacceptresponsibility foranyerrors,mistakesandoromissionsitmayprovideorforanylosseshowsoeverarising fromorinrelianceuponitsinformation,meaningsandinterpretationsbyanyparties. (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page v — #5 (cid:1) (cid:1) Tothememoryofourfathers,BernardBénabenandPietroPerrucci (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page vi — #6 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page vii — #7 (cid:1) (cid:1) Contents AbouttheEditors ix AbouttheAuthors xi Foreword xix MihirWorah PIMCO Acknowledgements xxi PARTI INTRODUCTION:MARKETSANDINSTRUMENTS 1 1 Inflation-SensitiveAssets 3 StefaniaA.Perrucci NewSkyCapital 2 InvestableCommodityIndexesandInflation:ABriefHistory 13 BobGreer PIMCO 3 Commodities,InflationandGrowth:ImplicationsforPolicy andInvestments 25 RicDeverell,KamalNaqvi CreditSuisse 4 InflationandRealEstateInvestments 43 BradCase;SusanM.Wachter NationalAssociationofRealEstateInvestmentTrusts (NAREIT);TheWhartonSchool,UniversityofPennsylvania 5 InfrastructureAssetsandInflation 69 GeraldStack,DennisEagar,KrisWebster MagellanGroup 6 EquityInvestmentsandInflation 79 StevenBregman,MurrayStahl HorizonKineticsLLC 7 Inflation-LinkedMarkets 103 GangHu;StefaniaPerrucci CreditSuisse;NewSkyCapital 8 UnderstandingandTradingInflationSwapsandOptions 137 BriceBénaben;HervéCros;FranckTriolaire NewSkyCapital;BNPParibas;MorganStanley vii (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page viii — #8 (cid:1) (cid:1) INFLATION-SENSITIVEASSETS PARTII RESEARCHANDMACROPERSPECTIVE 177 9 TheRoleofModelsinModernMonetaryPolicy 179 StefaniaA.PerrucciandDavidVavra NewSkyCapital;OGResearch 10 TermStructureofInterestRatesandExpectedInflation 209 OlesyaV.Grishchenko;Jing-ZhiHuang FederalReserveBoard;PennStateUniversity 11 MonetaryPolicy,InflationandCommodityPrices 255 FrankBrowne,DavidCronin CentralBankofIreland 12 InflationandAssetPrices 277 JohnA.Tatom IndianaStateUniversity 13 InflationandEquityReturns 299 JeffreyOxman UniversityofStThomas 14 InflationHedgingthroughAssetandSectorRotation 325 AlexanderAttié,ShaunRoache InternationalMonetaryFund PARTIII PRACTICALINSIGHTSFROMMARKETPARTICIPANTS 349 15 PracticalModelsforInflationForecasting 351 NicJohnson PIMCO 16 ProtectingInsurancePortfoliosfromInflation 369 KenGriffinandEdwardY.Yao ConningAssetManagement 17 Inflation,PensionsandLiability-DrivenInvestmentSolutions 389 MarkusAakko PIMCO 18 Ultra-High-Net-WorthInvestorsandtheRealAssetValueChain 423 IanBarnard CapitalGenerationPartners 19 InflationMarkets:APortfolioManager’sPerspective 435 StefaniaA.Perrucci NewSkyCapital 20 InflationIndexationandProductsinEmergingMarkets 479 BriceBénaben,StefaniaA.Perrucci NewSkyCapital Index 507 viii (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) “perrucci” — 2012/7/11 — 17:12 — page ix — #9 (cid:1) (cid:1) About the Editors Stefania Perrucci is the founder and CEO of New Sky Capital, an independentinvestmentandadvisoryfirmwithofficesinPhiladel- phiaandLondon.Shehas15yearsofinvestmentexperience,span- ningbothtraditionalandalternativeassetclasses.Beforefounding NewSky,shewasaportfoliomanageratMorganStanley,whereshe consistentlyrankedamongthetop-quartileperformers.Herflagship fundwastherecipientofaLipperFundsAwardin2008(basedontop three-yeartrailingperformance).BeforejoiningMorganStanley,she wasariskmanagementspecialistattheIFC,partoftheWorldBank Group. Stefania has established herself as a recognised thought- leaderandindependent-mindedinvestor.In2006,shewasoneofthe fewbuy-sidevoicesadvocatingalonginsurancepositiontoprotect against the effects of an imminent collapse in house prices. She is theauthorofseveralproprietarymodels,withonepatentawarded and another pending. She has published cutting-edge research on severalmarkettopics,andspeaksregularlyatindustryconferences aroundtheglobe.SheistheeditorandauthorofMortgageandReal EstateFinance.StefaniareceivedherPhDintheoreticalphysicsfrom the University of Virginia, and a Laurea Summa Cum Laude from the University of Modena, Italy. She has held academic positions at universities in both the US and Europe, receiving more than a dozenawards,inrecognitionofoutstandingacademicandteaching achievement. BriceBénabenisamanagingdirectorandheadofinflationresearch atNewSkyCapital.Hehas15yearsofinvestmentexperience.Pre- viously,heheldpositionsasmanagingdirectorandglobalheadof propertyderivativesandinflationtradingatDeutscheBank,deputy head of inflation at Citibank, head of inflation structuring atABN AMRO,headoffixedincomeandportfoliostrategyatCreditAgri- coleIndosuezandportfoliomanger/traderattheIFC(WorldBank Group). Brice is the editor and author of Inflation-Linked Products, co-editorandauthorofInflationRisksandProducts,andco-authored “RealEstateIndexesandPropertyDerivativeMarkets”inMortgage andRealEstateFinance.HeisagraduateoftheUniversityofOxford, wherehestudiedappliedmathematics. ix (cid:1) (cid:1) (cid:1) (cid:1)
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