BNY Mellon Investment Manager Unveils Investment Program Aimed at Optimizing Tradeoffs Between Expected Returns, Portfolio Volatility and Unexpected Inflation
Unexpected inflation resulting from mounting debt burdens and easy monetary policy in developed nations could reduce the values of stocks and bonds, according to a report from Mellon Capital Management Corporation, the San Francisco-based multi-asset manager for BNY Mellon.
"Since the onset of the financial crisis in 2008, both fiscal and monetary policies across the globe have been unprecedented," said Karsten Jeske, co-author of the report and senior research analyst at Mellon Capital. "The U.S. especially has been troubled by persistently high deficits, with one trillion dollars added to its deficit each year since 2008."
In addressing this potential threat, Mellon Capital has unveiled a comprehensive program to help investors optimize the tradeoffs among expected returns, portfolio volatility and unexpected inflation.
The program is detailed in its report, Unexpected Inflation Hedging: A 3D SUPER Approach. The report distinguishes between expected inflation and unexpected inflation, which it defines as the difference between realized inflation and expected inflation for the same period.
"Past experience indicates that unexpected inflation is detrimental to both equity and nominal bond returns, while some other asset classes such as commodities and commodity-sensitive equities can help alleviate this risk," said Anjun Zhou, the other co-author of the report, and head of multi-asset research, of Mellon Capital. "However, trying to anticipate unexpected inflation by moving into passive commodity indices would come at a cost, because these assets tend to have lower expected returns."
In its report, Mellon Capital extends the Modern Portfolio Theory by establishing a three-dimensional efficient frontier surface, which it uses to help determine the optimal trade-off among expected returns, portfolio volatility and unexpected inflation. The Mellon Capital programs are designed to move the efficient frontier upwards with the goal of providing improved unexpected inflation protection that would not have to reduce expected return, the report said.