Pimco Launches New Fund To Capitalize On Long-Term Inflation

Pacific Investment Management Co., one of the world's largest asset-management shops, is launching a new fund that aims to take advantage of inflationary trends by investing in a broad range of assets.

The Pimco Inflation Response Multi-Asset Fund, launched Tuesday, hopes to bank on the firm's long-term view of rising commodity prices and weakening developed-nation currencies. The inflation-oriented fund looks to protect investors against and earn returns based off rising prices with investments across various asset classes, including Treasury Inflation Protected Securities, commodities, emerging-market currencies, gold and real estate investment trusts.

The new fund will be managed by Mihir Worah, head of Pimco's Real Return portfolio management team.

"This fund is an effort to address both the possibility of higher-than-expected inflation over time as well as the desire for a one-stop solution that can protect and even benefit from a wide variety of inflation scenarios by deploying the broadest possible set of tools," Worah said in an emailed response to questions about the fund.

Before fears about a global economic slowdown started taking a toll on investors' sentiment this summer, inflation was one of the market's biggest concerns. At the time, oil prices were soaring and emerging-market policymakers tried to keep growth in check by hiking rates.

Even though commodity prices have eased from their peak in April, Pimco sees continuing upward pressure over the next few years, fueled by a weaker U.S. dollar and "what we see as the Federal Reserve's inflationary bias," Worah said. Worah also said that his team expects the dollar to weaken as much as 10% to 15% against emerging-market currencies in the next couple of years.

Currently, the fund's holdings reflect a modest preference for TIPS and gold as defensive assets, Worah said, and a slight underweight in commodities and REITs. It also owns some securities that will help protect against a swift decline in equity markets.

Gold is traditionally considered a good store of value and a popular way to hedge against rising prices, which erodes the worth of other investments over time. As of Monday, Comex gold futures are up 25% on the year.

TIPS, which see their value grow as consumer prices climb, have been among the best performing U.S. fixed-income assets this year. Through Monday, TIPs have offered investors 11.8% in return, according to the Barclays Capital TIPS index, topping regular Treasury bonds' 7.8% return in the same time frame.

"In the near term, we think shorter maturity TIPS yields will have a hard time going lower unless we see truly unconventional measures, beyond maturity extension, coming from the Fed," Morah said. "Longer maturity real yields, however, could still decline from current levels."

The product debuts at a time of great uncertainty across financial markets, and inflation has lost its perch at the top of investors' concerns. Still, Morah says "inflation hedging is a long-term portfolio strategy" and believes that many investors' holdings aren't aligned with the risks of rising inflation.

Pimco oversees more than $1.3 trillion assets globally, including $245.5 billion in the Total Return Fund managed by founder and co-chief investment officer Bill Gross.

-By Cynthia Lin, Dow Jones Newswires; 212-416-4403; [e-mail]