Building Inflation-protected Portfolios - Blackrock in Focus
This morning’s hotter-than-expected June PCE reading followed another 75bps Fed rate hike, adding renewed fervor to one of the year's top debates - how to build portfolios for the highest inflation in 40 years.
Blackrock’s Head of Thematic and Active Equity ETFs, Jay Jacobs, recently put out a great piece highlighting a few places investors could find returns amidst sustained inflation.
The three strategies center around:
- Agricultural technology to combat rising food prices
- Clean energy solutions for stable power generation and protection from geopolitical risk
- Infrastructure services that benefit from long-term contracts and durable demand
Jay goes into great detail explaining the investment thesis around each inflation-protected idea, but the challenge for investors becomes:
- How to identify the individual concepts that comprise a thesis like ag tech or clean energy?
- How to find the companies that will get the most exposure to that idea? Which companies are investing the heaviest and who has the positive (or negative) sentiment?
The good news for challenge #1 is that Jay has done the bulk of the heavy lifting for us. The meat of his justification contains many of the rich keywords and natural language that industry participants use to describe the space.
Noonum extracts all of these concepts from the text and helps an investment manager find related ideas to help build out their strategy.
Inflation hedge in focus: Agricultural Technology
Let’s look at some excerpts from Jay’s defense of ag tech (Noonum extractions in bold).
“We anticipate there could be significant investment in agricultural technology and food innovation in the face of continually rising food production costs.”
Qualifying words like “significant” and “rising” help inform sentiment models.
Jacobs goes on to add:
“Precision agricultural and agricultural robots can produce more food, on less land, with significantly less water and other inputs, allowing for substantial efficiency gains and lower food production costs.”
Identifying all the relevant concepts and components to fit into a strategy is the first step in building a custom portfolio. With Noonum, we can aggregate these concepts and then identify related ones to help build out a thesis.
Themes like hydroponics or vertical farming can be evaluated and added to build a more comprehensive strategy. From there, Noonum instantly combs through thousands of news sources, as well as corporate filings, earnings transcripts, and patents to find the most exposed companies to any custom strategy.
Industry mainstays like Deere top the universe, but we can also find names like AGCO – a leading manufacturer of precision agriculture solutions and machinery. It has outperformed the S&P 500 by over 6% YTD and held up well in this inflationary environment.
Inflation hedge in focus: Clean Energy
Blackrock goes on to defend its stance around clean energy, arguing:
“Clean energy sources like wind and solar can generate energy in a variety of natural or geopolitical environments, making reliable production more shock resistant. Moreover, we see the price of clean power generation is currently generally stable, rather than variable, because inputs are not linked to volatile commodities like oil. While environmental factors can vary, optimized systems featuring multiple clean energy sources, and supportive infrastructure like smart grids and energy storage, can offer reliable and consistent energy.”
So much rich terminology in just a few sentences.
All of this research can quickly be distilled into a sustainable energy strategy. An investor can then analyze how each of these themes has evolved over time.
This space is constantly evolving – especially in what constitutes “sustainable” and the public-private effort to find the right mix of options to meet global energy demand.
Asset managers running ESG funds beholden to the European Union’s definition of approved “sustainable investments” were dealt a curveball a few weeks ago when the EU added "natural gas" and "nuclear" to its taxonomy for approved investments.
Noonum enables the creation of adjustable strategies so that a clean energy thesis can be customized to suit an investor’s needs and desired allocation to a particular power source or investment view.
Love natural gas and hydrofuels but are concerned about the intensive land needs of wind power? Worried about the supply chain for solar panel production or sourcing cathode materials for lithium-ion batteries to power EVs?
Building a portfolio around a great idea starts with finding the right way to express that view. Define your strategy, then find the most representative companies driving the space.
Alternatively, Noonum can help compare different ETFs that provide exposure to a strategy, like the Solar Invesco ETF (TAN), up ~19% over the last five days, versus the more diversified iShares Clean Energy ETF (ICLN, +14%).
Editor’s note: sign up for Noonum research at research.noonum.com
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Disclaimer: all opinions expressed are the author’s own and nothing contained in this column is intended as financial advice