Morningstar’s top inflation-fighter funds include offerings from Vanguard, T. Rowe Price and Parnassus.
Inflation is on a rampage, with consumer prices soaring 7.9% in the 12 months through February, a 40-year high.
So perhaps you’re contemplating investments that can stand up to surging prices. Investment research firm Morningstar put together a list of “inflation-fighter” mutual funds and exchange-traded funds. Here are three gold-rated funds, Morningstar’s top ranking.
1. Vanguard Short-Term Inflation-Protected Securities ETF
This fund (VTIPX) – Get Vanguard Sh-Trm Inf-Prtc Sec Idx Iv Report focuses on Treasury Inflation-Protected Securities (TIPS).
It’s a “great TIPS fund because of its low fee and sensibly constructed portfolio,” Morningstar analyst Neal Kosciulek wrote in a commentary. The fund has an expense ratio of just 4 basis points, according to Morningstar.
When the consumer price index (CPI) rises, the value of the TIPS’ principal is adjusted upward, which means higher coupon payments.
The fund tracks the Bloomberg U.S. Treasury TIPS zero-five-year index. The index is market-value weighted. “This is a sound approach because the market does a decent job pricing these bonds, while it is also cost-effective and promotes low turnover,” Kosciulek said.
“The fund courts much less interest-rate risk relative to most peers because it targets the short end of the TIPS maturity spectrum.”
The fund’s focus on short-term TIPS lessens its chances to outperform its peers, he said. “But it also strengthens the fund’s sensitivity to CPI, because short-term interest rates are more correlated with CPI than long-term rates.”
2. T. Rowe Price Floating Rate
This mutual fund (PRFRX) – Get T. Rowe Price Floting Rate Report focuses on loans with interest rates that float, so now is a time when their yields should rise.
“T. Rowe Price Floating Rate stands out versus peers with its experienced portfolio managers and deep credit research team that complements this offering’s selective, risk-aware approach,” Morningstar analyst Paul Olmsted wrote in a commentary.
“The strategy’s consistent process is dictated by careful, fundamental credit research performed by an experienced analyst team that covers the gamut of non-investment-grade debt.”
The fund principally goes for BB and B loans, while opting for less CCC loans. “The strategy‘s exposure to debt rated CCC or below (12% of assets as of December 2021) has modestly increased over the past couple of years, but only in high-conviction names with favorable structures and covenant packages,” Olmsted said.
The strategy has outperformed in multiple market environments he said.
3. Parnassus Core Equity Investor
This mutual fund (PRBLX) – Get Parnassus Core Equity Investor Report has an environmental/social/governance (ESG) focus. It excludes companies with a significant exposure to alcohol, tobacco, weapons, fossil fuels and nuclear power. And it seeks companies with ethical practices.
Downside protection has been a strength for this fund’s focused, roughly 40-stock portfolio, Morningstar analyst Stephen Welch wrote in a commentary. Parnassus Core Equity’s decline so far this year — 6% — is about in line with the S&P 500.
But the fund outperformed the S&P 500 during the 2007-08 financial crisis, 2018’s end-of-year pullback, and early 2020’s pandemic-driven sell-off, Welch noted.
“One reason for that is that almost all holdings have narrow or wide Morningstar economic moat ratings,” he said. While the fund typically lags in the ensuing rallies, the managers have shown skill in picking up depressed names that have proved beneficial in the rebound.”
For example, “in the first half of 2021, as the economy roared back to life, the managers trimmed some of their higher-valued tech names and moved into stable growers such as real estate firm American Tower AMT that offers a decent yield as well.”
The author of this story owns shares of American Tower.
