Wisconsin’s Capital Innovations Launches Inflation Protection Fund

Apr 2 2012 | 6:33am ET

Wisconsin-based investment firm Capital Innovations has launched the Capital Innovations Inflation Fund, blending the agribusiness, timber and infrastructure strategies of the firm’s three existing funds.

Launched in February with “multi-million dollar mandates” from two existing CI pension clients, the Capital Innovations Inflation Fund will use tactical asset allocation to invest in infrastructure, timber and agriculture in a variety of ways—including equities, REITs and master limited partnerships—CI chief investment officer (and co-founder) Mike Underhill told FINalternatives during a recent phone interview.

The strategy was launched at the behest of CI’s clients, says Underhill, who are running liability-driven investment programs. “LDI asset allocation views are based primarily on an understanding of how different asset classes behave at different points of the market cycle, but we also see clients take advantage of valuation extremes (such as the widening of credit spreads in late 2008.” 

Michael UnderhillMichael Underhill“[W]hen you look at the LDI programs that are out there, it’s a very challenging market in the sense that numerous corporate defined benefit plans are trying to implement exclusively bonds for LDI…and what they’re realizing is that…short and even near-immediate term bonds inherently have more risk than they initially model. And government bonds right now, with all of the fiscal deficit issues with government agencies…have a lot more risk than people assume.”

“[W]hat I tell everyone is, when you look at a fixed-income instrument and analyze it, you need to look at how much duration risk or interest-rate sensitivity you’re assuming as an investor as well as credit risk.”

Underhill says we’ve been in an “artificially low interest rate-environment” for over 20 years now and the purchasing power of the U.S. dollar has been eroded by 80% in the last 40 years.

“[When you examine inflation, it doesn’t exhibit itself in the traditional measurement of things like CPI…what you need to do is take a good hard look at some of the data around, for example, food…look at prices of meat, chicken, pork, bacon, things like that, they’ve gone up anywhere from as little as 20[%] to as much as 45% in the last two years, so inflation is evident I just don’t think many investors are measuring it appropriately.”

Inflation, says Underhill, is “the destroyer of future wealth” and “you need a whole diversified pool of real assets to hedge out that inflation.”

The new fund ostensibly focuses on three investment areas, but Underhill says the way CI views the world, most investments fall into these three areas.

“[L]ook at infrastructure—energy, communications, transportation, utilities—admittedly a $2.5 to $3 trillion asset class…[T]imber and forestry incorporates not only timber and forestry stocks, securities, but some of the cyclicals like the pulp and paper and all of the things in the supply chain of pulp, paper…and that includes REITs, stocks and MLPs, there are actually one or two timber MLPs. And then when you look at something like agribusiness, that incorporates things like fertilizers like potash…or seed corn, seed manufacturing…food storage, food distribution. And so when you look at these three segments they’re not really three segments of the markets as much as they’re three delineations in which we define the investable world in which there are thousands of investable securities.”

Investment decisions are made using a top-down, global, thematic approach. The CI team starts by analyzing countries, currencies and GDP figures; then it considers oil and the demand outlook for oil, geo-political considerations, non-oil commodities, consumption growth and monetary policy. All this analysis has led them to places like Brazil, Chile, Indonesia, Malaysia and Taiwan—the kind of emerging markets with “stable, firm-to-positive” GDP environments which Underhill says will “comfortably outperform the developed markets” through 2016 and lead the global economic recovery.

Underhill says they’re currently running a little over $30 million in the new fund but that they have another $130 million lined up, included $50 million from an unnamed Asian sovereign wealth fund. Interest has been keenest, he says, from institutional investors in Europe and Asia, particularly those in markets where inflation is beginning to bite. Capacity for the strategy, he says, is $3 billion and the minimum investment is $1 million.

Capital Innovations also runs three managed accounts strategies: Capital Innovations Global Listed Infrastructure Securities, established in 2008 with generated annualized returns of 13.78%; Global Agribusiness Securities, established in 2010 with generated annualized returns of 39.49%; and Global Timber Securities, launched in 2009 with generated annualized returns of 13.86%.

Underhill says that in the new fund, they have combined the three strategies “and then we allocate amongst them predicated upon Capital Innovations overall economic outlook, so the numbers and the track records and the performance you see, that type of risk efficient investing will be delivered through the new real-asset composite.”

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