For example, value stocks tend to outperform growth stocks at times of rising inflation, as would stocks with inflation-linked revenue streams such as utilities or infrastructure companies.
“This can be helpful but is not a substitute for a proper LDI programme,” says Popat.
The idea of looking beyond index-linked gilts would be music to the ears of some trustees, frustrated with the lack of alternatives.
THE TRUSTEE’S VIEW
John Flynn, a member nominated trustee of the former British Gas scheme, now part of National Grid, is one such an individual.
He is frustrated that professional advisers are excessively cautious and do not consider alternatives to index-linked gilts.
“All they talk about is safe havens in gilts and bonds and other assets in terms of their gilt-like qualities,” says Flynn. “You need some certainty for a number of years down the road, but you also need some pump priming from reward-seeking assets.”
Long-term investors have long time horizons and he would like to see a balance struck, because in the longer term, those assets will deliver returns.
“Though the last 12 years have been tortuous,” says Flynn, “I am fed up as a trustee of being told what we have to play with now is the same as pre-2008. This is not looking at the reality of today.”
THE FINAL ANALYSIS
It is important to remember this study, while examining some interesting opportunities, is an academic paper and shouldn’t be seen as a product strategy.
That said, Popat and Flynn show there is clearly demand for investors doing more than tracking CPI by stuffing money into gilts.
Christie says it is certainly something for trustees to think about and may force them to consider “the income characteristics of asset classes rather than the total return from a cashflow point of view”.
Popat also warns about the dangers of placing too much faith in historical analysis.
“It requires careful interpretation,” he says. “US oil imports have fallen by 40% in the last three years, whereas UK oil imports have been on a steadily rising trend for about 10 years as North Sea oil production has declined. ”
He concludes: “So in a scenario where oil prices are a major driver of UK inflation or disinflation, US TIPS will be less effective from a hedging perspective than in a scenario where oil prices are stable.”