Finding yield in a zero-rate world is making life tough for fixed income investors, and inflation is only making the job more difficult.
Purnima Puri at HPS Investment Partners is deploying three strategies to get returns for her clients as price pressures continue to mount, a situation that Federal Reserve Chairman Jerome Powell said Wednesday he is finding "frustrating."
"If you've got that kind of a environment where people need to buy yield, they're kind of searching for the least negative real yield, I would argue," Puri said Wednesday during CNBC's Delivering Alpha conference.
Like her co-panelist, Elizabeth Burton, chief investment officer for Hawaii's Employees' Retirement System, Puri said she is not owning U.S. Treasurys at a time when they're delivering negative real yields when accounting for inflation.
Instead, she put forth three areas of fixed income she's investing in now: floating rates, specifically loans of companies with high levels of debt to income; shorter-duration high yield, and noninvestment-grade credit with high risk premia.
"We do think those are kind of the three ways that you can get some degree of inflation protection, both from base rates, meaning floating rates, and also spreads," said Puri, who is her firm's governing partner and public credit strategies portfolio manager.
Inflation drives down the value of fixed income due to the capital depreciation that happens when prices fall as rates rise.
Puri did say she could see people going back into U.S. government debt as rates start to rise, given that so much of the rest of the world is offering extremely low yields.
How long will it last?
Burton said investors need to be thinking about inflation strategies. Her portfolio returned 26.1% over the past fiscal year, the best in the system's 95-year history.
Fed officials are insisting that inflation, which is running at a 30-year high, is transitory due to factors brought on by the pandemic. Burton disagrees.
"I have never thought it was transitory. I've been talking about inflation for the past year and a half," she said. "I think there are parts of things that have gone up that are transitory. … But I think a lot of the things … like home prices, I don't see signs of that falling."
Burton said she is owning stocks now, primarily defensive sectors and high-quality.
"We have to own equities. I'm not sure how anyone over the long term hits their target without owning equities," she said. "I wouldn't be overweight, and I would pick carefully."
Puri added that she sees inflation as a risk and isn't sure if the Fed raising rates will help.
"I think that we are going to see inflation and I think currently it's being driven by growth and it's being driven by supply chain problems," she said. "The question becomes, are you going to be able to resolve the supply chain problems? And if you're not able to resolve the supply chain problems, then it's not clear that raising rates is going to help you quell inflation."
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