By Lewis Braham
Inflation can be especially tricky for investors. What's good for oil or gold in one economy could be bad for either asset class in another. Sometimes real estate benefits, and other times, inflation-linked bonds or foreign currencies.
The Pimco Inflation Response Multi-Asset fund has the goal of finding the optimal mix of these inflation-resistant asset classes. The $2.4 billion actively managed fund has successfully navigated different markets when one or another asset is in favor. Its 6.6% 10-year annualized return beats 97% of its peers in Morningstar's Global Conservative Allocation category, which averaged a 4.3% return.
With inflation at 3.8%, a three-year high, it's especially relevant right now.
Pimco's fund shouldn't be compared to the S&P 500 index. Think of it as a way to diversify a portfolio of stocks and traditional bonds. For its benchmark, the fund's management team developed a composite index of 45% Treasury inflation-protected securities, or TIPS; 20% commodity futures; 15% emerging market currencies; 10% real estate investment trusts; and 10% gold.
Commodities, real estate, and gold are all "real" assets and often rise with inflation. The Pimco fund's co-manager, Daniel He, says the team tries to find a suitable mix, along with TIPS and currencies, for each environment, but also a combination that has a low overall correlation to traditional assets such as stocks and bonds. "While [our assets] offer good returns when inflation surprises to the upside, they also offer a regular return when it's a normal environment," He says.
Historically, the fund has had about a 50% correlation to the stock market, according to He, meaning it moves in the same direction as stocks 50% of the time. Thus, when inflation spiked to 9% in 2022, the S&P 500 lost 18% and the Bloomberg U.S. Aggregate Bond Index lost 13%, but the fund fell only 5.4%. Yet it has risen along with stocks every year since then, though typically with smaller returns.
Last year, during the tariff-related selloff from Feb. 19 through April 8, stocks fell 18.8% but the Pimco fund fell only 3%. And in March, as investors panicked about the Iran war and $100 oil, the S&P 500 fell 5% and the fund, 2%. So far in 2026, the fund is up 7.9%, beating 90% of its peers.
TIPS play an important role in the fund, with a 64% portfolio weighting currently versus the benchmark's 45%. (The fund can employ modest amounts of leverage, so total weightings can exceed 100%.) The team employs a risk-parity approach to its asset allocation. Because TIPS are U.S. government bonds, for example, they are much less volatile than gold, REITs, commodities, and currencies. For TIPS to have an equal impact on the fund's returns and achieve parity with the other asset classes, they need a greater weighting. It takes only a small weighting in volatile commodities to have a large impact.
Active management allows He and his three co-managers to deviate from risk parity if the team favors a particular asset class. But they typically don't want the fund's volatility to be much higher than its benchmark.
Currently, inflation is at 3.8%, above its historical trend and the Federal Reserve's 2% long-term target rate. A TIPS bond pays the inflation rate plus a "real yield" above it. For 10-year TIPS, that is now 1.9 percentage points -- 5.7% total. Ten-year Treasury notes, by comparison, pay 4.4%.
That attractive TIPS pricing is despite a "backdrop of five years of above the Fed's target [of 2%] inflation," He says. "That's one of the main reasons that we have that overweight TIPS position." He also thinks inflation expectations priced into the TIPS market are understated, given the continuing oil shock from the war. This is especially true for TIPS with maturities greater than one year, which are priced for 2.2%-2.3% inflation.
To protect the fund, the managers hedge some of the TIPS exposure by betting against traditional Treasuries with futures. That reduces the volatility of the TIPS position and makes it "more of a pure inflation expectation view," He says. One of the unpleasant surprises of the inflationary 2022 market was to see many TIPS funds suffer, like the popular Schwab U.S. TIPS ETF, which lost 12% that year. Despite their inflation component, TIPS are still sensitive to interest rates, and the longer the maturity of the TIPS is, the more rate-sensitive it is. Rates soared in 2022, hurting long-duration TIPS. He wants to reduce that rate-sensitivity.
In commodities, the team favors base industrial metals like aluminum, nickel, lead, and zinc, as artificial-intelligence and military buildouts increase demand while reinvestment rates by miners remain low, constricting supply. Oil is a bullish call, too, because of the war. The fund has a 23% commodities weighting, slightly higher than the benchmark's 20%. Yet the team is relatively bearish in the short term on gold, which is richly valued relative to other inflation-sensitive assets. The fund has a neutral 10% weighting.
In real estate, the team likes data-center REITs like Equinix, with property values rising from the surging demand for data storage and processing by AI hyperscalers. The fund also holds senior housing REITs like American Healthcare REIT because of aging demographics and limited new supply.
The fund's expense ratio is 1.09% for its A share class. Some brokers, such as Charles Schwab and Fidelity, offer the I institutional share class, which charges 0.69% on minimum investments as low as $1. These fees exclude the cost of leverage and hedges, which add both to returns and costs in complex ways.
Either of these fees are much higher than your average stock index fund. But then, no index fund has a unique strategy like this one.
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May 13, 2026 02:00 ET (06:00 GMT)
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