Defined contribution (DC) plan sponsors should consider adjusting their core menus amid elevated inflation, which can erode the purchasing power of savings, a critical concern for those in or near retirement. In this Q&A, Greg Sharenow, commodities and multi-real-asset portfolio manager, Georgi Popov, strategist, and Alison Schiraldi, institutional client manager, discuss approaches that may help diversify DC core menus.


Sharenow: In the U.S., headline inflation may have peaked, but is likely to moderate to levels above central bank targets. Core inflation is elevated and starting to appear more entrenched. In recent months, inflation has broadened beyond pandemic-related global goods to areas such as shelter and services. Measures of “sticky” inflation highlight that inflation may remain elevated for longer than central banks had initially hoped, especially in the U.S. However, the good news is that central banks have reacted to these developments by dramatically adjusting their stance of monetary policy. While inflation uncertainty is high, the rapid tightening in financial conditions to restrictive levels should moderate inflation over time.

High and rising inflation has occurred against a backdrop of secular efforts to build supply chain resilience and a transition toward green energy sources (see our June 2022 Secular Outlook, “Reaching for Resilience”). Over the long term, higher prices should provide a strong incentive to innovate, but in the near term higher costs due to shortening the supply chain will prevent inflation from returning to lower, pre-pandemic levels.


Popov: One approach is to add single-sector inflation-hedging assets – such as Treasury Inflation-Protected Securities (TIPS), commodities, and real estate investment trusts (REITs). These options are typically straightforward and may complement dominant stock and bond offerings. Still, a potential drawback is that participants may be challenged to know which option(s) to select, how much to allocate, and when to reallocate.

To avoid these challenges, plan sponsors could turn to a multi-real-asset inflation solution that delegates these decisions to a professional manager. Potential benefits include:

  • Diversification: Combining a variety of inflation hedges in a single solution may enhance portfolio resiliency across a range of economic and market environments.
  • Reduced volatility and drawdowns: TIPS and gold tend to be uncorrelated with stocks, while REITs, commodities and emerging market (EM) currencies have had low correlation to bonds historically. A diversified real asset portfolio may help mitigate risk in a participant’s portfolio, including potentially dampening losses during bear markets.
  • Excess returns from active management: Tactical allocation among asset classes may enable the portfolio to respond to varying sources of inflation and focus on real assets with the highest relative value.


Sharenow: We aim to take advantage of inflation and improve real (i.e., inflation-adjusted) returns. We do this by investing in assets that have historically responded well to inflation, especially unexpected inflation, while keeping in mind the underlying drivers and relative value of each asset.

Our Inflation Response Multi-Asset Strategy (IRMAS) combines five inflation-hedging components, weighted roughly equally by their contribution to overall risk, in order to seek enhanced diversification potential (see Figure 1). The underlying assets include:

  1.  TIPS, which are U.S. Treasury bonds whose value is contractually linked to the Consumer Price Index (CPI). Therefore, TIPS can provide a one-for-one hedge against inflation shocks. Although performance has been challenged this year, TIPS have meaningfully outperformed like-maturity nominal Treasuries over the last three- and five-year periods (as of 31 October 2022).
  2. Commodities may help hedge against rising food and energy prices, which make up a quarter of the CPI basket and are its most volatile components.
  3. REITs may offer potential mitigation against increases in the costs of housing, which make up about a third of the CPI basket.
  4. EM currencies may help offset inflation driven by higher import costs.
  5. Gold, a time-tested inflation hedge that cannot default, may provide value in the event of currency devaluations.

The portfolio’s benchmark is the Inflation Response Index, a custom index pioneered by PIMCO and published by Bloomberg. Its composition is 45% Bloomberg US TIPS Index, 20% Bloomberg Commodity Index Total Return, 15% JPMorgan Emerging Local Markets Index Plus (Unhedged), 10% Dow Jones U.S. Select Real Estate Investment Trust (REIT) Total Return Index, and 10% Bloomberg Gold Subindex Total Return Index. The index is the starting point for the IRMAS portfolio, which uses active management to seek excess returns within and among sectors, looking at relative attractiveness and risk/reward characteristics.

Figure 1 illustrates the broad contours of how PIMCO constructs the IRMAS strategy. Asset allocation decisions reflect both top-down macroeconomic views and bottom-up research on specific securities. As of October 31, 2002, the allocation was 45% TIPS, 20% commodities, 10% real estate, 15% currency, and 10% gold.

We view IRMAS as a complement to traditional stocks and bonds. In addition to inflation-hedging potential, the strategy diversifies stock and bond holdings, where the vast majority of DC participant assets are concentrated. While stocks and bonds tend to diversify each other during periods of high growth (when stocks tend to do well) or low growth (when bonds typically do well), both stocks and bonds tend to respond negatively to inflation surprises, as 2022 asset returns show.


Popov: Let’s use a simple 60/40 stocks-and-bonds mix as our starting point. As Figure 2 summarizes, bonds and stocks typically react negatively to inflation surprises. Therefore, the 60/40 mix has negative sensitivity to changes in inflation, or a -2.5 inflation beta (inflation beta quantifies the magnitude of an asset’s response to inflation; for every 1 percentage point change in CPI, expected returns move by a multiple reflected by its inflation beta). By comparison, $1 invested in TIPS (a single real asset) provided only $1 in inflation protection.

In DC plans, keeping allocation decisions simple for participants is key. IRMAS seeks to be an inflation-hedging portfolio that can help maintain purchasing power. A $1 investment in IRMAS provided $2.6 in inflation hedging annually, based on the strategy’s inflation beta.


Schiraldi: Plan sponsors have taken several approaches. For a core menu of direct offerings, a common approach is to add IRMAS as a standalone inflation-hedging strategy, where it may complement existing equity, bond, and capital preservation options. For sponsors offering white-labeled funds, a “real asset” or “inflation-hedging” fund could be built by simply white-labelling IRMAS or by pairing it alongside complementary strategies as part of a multi- manager approach.

For plan sponsors with a custom target date strategy, IRMAS may serve as a strong diversifier to risks that dominate these strategies. Should the composition of the IRMAS underlying assets not be well suited to your plan, PIMCO can also collaborate with you to create a custom portfolio of inflation-fighting assets to seek a desired risk/return profile. Finally, for sponsors considering retirement solutions for participants who are nearing or at retirement, IRMAS may be a worthy addition to a custom retirement income strategy due to its flexible, diversified portfolio and goal of preserving investor purchasing power.

Figure 2 shows inflation betas – the sensitivity to changes in CPI –  based on rolling annual data by month, from March 1997 to October 2022. The 60/40 portfolio had an inflation beta of -2.5, TIPS had an inflation beta of 1, and the IRMAS Index had an inflation beta of 2.6.


Schiraldi: We understand that communicating with participants is an important, and often challenging, element for plan sponsors seeking to offer a new strategy. PIMCO communication support includes:

  • Coordination with recordkeepers on fact sheets, data feeds, and quarterly updates
  • Communications, in varying formats, provided by PIMCO’s participant engagement team
  • Materials for plan sponsor education meetings

Additionally, we offer robust education and support to our plan sponsor partners in the form of DC-related insights across a variety of market and investment-related areas.

The Author

Greg E. Sharenow

Portfolio Manager, Commodities and Real Assets

Georgi Popov

Product Strategist



Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when

redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be appropriate for all investors. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Derivatives and commodity-linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.

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Bloomberg US Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. It is not possible to invest directly in an unmanaged index.

The PIMCO Inflation Response Index is a blend of 45% Bloomberg US TIPS Index, 20% Bloomberg Commodity Index Total Return, 15% JPMorgan Emerging Local Markets Index Plus (Unhedged), 10% Dow Jones U.S. Select REIT Total Return Index, 10% Bloomberg Gold Subindex Total Return Index. Bloomberg US TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation-Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $500 million par amount outstanding. Performance data for this index prior to October 1997 represents returns of the Bloomberg Inflation Notes Index.

Bloomberg Commodity Index Total Return is an unmanaged index composed of futures contracts on 20 physical commodities. The index is designed to be a highly liquid and diversified benchmark for commodities as an asset class. JPMorgan Emerging Local Markets Index Plus (Unhedged) tracks total returns for local-currency- denominated money market instruments in 22 emerging markets countries with at least US$10 billion of external trade. The Dow Jones U.S. Select Real Estate Investment Trust (REIT) Total Return Index is a subset of the Dow Jones Americas Select Real Estate Securities Index (RESI) and includes only REITs and REIT-like securities. The objective of the index is to measure the performance of publicly traded real estate securities. The indexes are designed to serve as proxies for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate. Prior to April 1st, 2009, this index was named Dow Jones Wilshire REIT Total Return Index. Bloomberg Gold Subindex Total Return Index reflects the return on fully collateralized positions in the underlying commodity futures.

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