We discuss asset growth at PIMCO Income, dividend stock picks in healthcare, and more with Eric Jacobson on this week’s episode.
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
Investing Insights: Dividends Picks, TIPS, And PIMCO Income
Whether it's Sherwell tips or bonds. And with an inflation protection built in and the way that that works is there prices there are underlying prices are indexed to the CPI the Consumer Price Index. And so the idea is as the CPI goes up eventually their prices should fall. So what are some of the risks. Techs people are saying this is a risk free asset but what does that mean. Right. Well they aren't exactly risk free because they are bonds and they do have sensitivity to interest rates. So in other words as yields move up for example the price of TIPS can go down. Now people think that their risk free because their end payment of the maturity value is going to be indexed to inflation and you can't get less than you paid for them. But along the way the price can go up and down quite a bit. They tend to be very long duration long maturity instruments and the price can swing up and down all around which they do and they're pretty rate sensitive. So even the inflation protected future isn't guaranteed if you sell it before maturity. That's right. Well right. The underlying principle value will probably creep up a little bit every year as long as we have some inflation which is what we get. And so instead of being a thousand dollars the underlying principal value will go up so maybe twelve hundred 3200 over a long period of time.
But on a day to day basis they're going to trade like other bonds so if it has a 3 percent coupon and yields move up 25 basis points or 50 basis points the price is going to go down. And that's going to happen quickly. So they tend to be pretty volatile depending on how long maturity their tips might not be something that every investor needs. You know some people may say oh I have a lot of equity exposure I'm protected from inflation for through that. What do you think makes sense for and what role should they play in a portfolio. Well I think that's a good point. There are investors who feel very comfortable with their equity investments that over a long period of time they're gonna protect them from inflation. But there are a lot of people to want more balance in their portfolio. And the nice thing about tips is you are definitely going to at least pace with inflation with the tip spawn and the other thing is that when when there is a crisis and when other assets are getting killed because they have a lot of credit risk or equity risk and so forth. Tips Will generally hang in there pretty well. It's not all the time they're not as liquid as regular treasuries but they are government backed bonds. So they are a source of some stability and safety even if they can be pretty volatile in the short term. Long term there are very good inflation hedge. So what are some of the inflation protected bond funds that we recommend. What are some of the strategies that are best in breed. Well there's a couple that we like a lot. The first one is Vanguard Inflation Protected Securities.
And like a lot of other Vanguard funds as you'd expect it does have some active management but the TIPS market is very efficient relatively speaking and there's not a lot you necessarily want to do. So it's a pretty plain vanilla fund and it's really really cheap. That's when we like a lot.