Meketa Investment Group advises investors to hold public natural resource equities (NREs) as a portion of their inflation-hedging assets. This is because diversified institutional portfolios should devote some assets to protecting against unexpected inflation, and public NREs are one of several asset classes whose value holds steady or appreciates during periods of unexpected inflation. However, unlike other inflation-hedging assets, public NREs have long-term returns closer to those of broad equities; thus, holding them presents less of an opportunity cost. At the same time, public NREs have historically been volatile, which presents behavioral finance challenges, but also rebalancing opportunities for disciplined investors.
This report includes two main parts: a high-level review of inflation and how one can hedge against it, and a discussion of the efficacy of public NREs as inflation hedges. We also provide an assessment of the current environment in Appendix A.