Five tips for inflation-proofing a high-net-worth portfolio

The role of family office managers in contending with inflation can be challenging because it involves additional responsibilities

David Israelson  •  Financial Post
Published Feb 10, 2022  •  Last updated Feb 14, 2022  •  2 minute read
A holistic and multi-year approach to inflation protection includes balancing liquidity and exposure.
A holistic and multi-year approach to inflation protection includes balancing liquidity and exposure. GETTY IMAGES

How should family offices approach inflation? A sound inflation-proofing strategy is important for managing any portfolio, but for the complexity of an ultra-high-net-worth portfolio sometimes it takes a little finesse.

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The role of family office managers in contending with inflation can be challenging because it involves additional responsibilities such as succession planning and keeping various family members in the loop on long-term strategies.

Nevertheless, managing inflation for any high-net-worth-portfolio has similar challenges to what the managers of large pension funds face. Chris Farkas, advisory practice partner and national asset management leader, KPMG Canada, offers five suggestions for family offices:

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  1. Despite confidence in central banks’ ability to manage inflation over the short to medium term, inflation protection is top of mind for asset managers.
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  2. Investment decisions become harder when inflation is on everyone’s mind.
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1. Take a holistic “total portfolio approach.” This should include stress testing — projecting what might happen in worst-case scenarios, such as runaway 1970s-style inflation or a sudden hike in interest rates, and taking steps to mitigate against the worst.

2. Take a multi-year approach to inflation protection — if inflation becomes a big worry, start with the more liquid and accessible assets and adjust them, then gradually integrate illiquid direct real assets that may be exposed to inflation.

3. Be ready for surprises and take opportunities — look at short-term tactical trading opportunities that inflation might offer. A classic inflation-based opportunity is to sell real estate in a rising market.

4. Integrate ESG consideration — beware of competing interests and deal with them. It might look like a great inflation hedge to invest in , say, a coal company, but consider what will happen if inflation subsides – no one wants coal anymore and carbon pricing gets serious.

5. Watch your cash flow requirements — your liability profile is important as well as your net worth, and it can be critical to the time horizon of your investments. It’s one thing to lower cash holdings because of inflation, but being illiquid over the long term can be a problem.

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