The cofounder and the investing chief of a $3 billion family office for the ultra-wealthy share 3 trades they're making to protect clients' portfolios from rising inflation — or thrive in spite of it

• Investors are growing more and more concerned about higher inflation derailing the recovery.
• A multi-family office managing $3 billion explains how it’s helping clients hedge against inflation.
• Levered real estate, equities tied to pricing power, and international markets can soften the blows.
• See more stories on Insider’s business page.

Investors have grown uneasy with all the chatter about inflation as prices begin to rise and April’s consumer price index — a key measure of inflation — came in higher than expected.

Their concerns led to a more than 4% sell-off in the S&P 500 from its most recent record high after the CPI data came in last week.

Whether higher inflation is a short-term problem as the economy begins to recover from the pandemic or it’s here to stay is anyone’s guess at this point. But one investment firm has some strategies for how you can protect your portfolio either way.

TwinFocus is a multi-family office that manages over $3 billion in assets for ultra-high net worth clients. It recognizes that markets have been highly sensitive to the headlines regarding core levels of inflation over the past several months. And while TwinFocus acknowledges that much of the inflationary pressure has been due to overall supply constraints, the firm is ready to ride out any scenario, including long-term inflation.

“There’s been a concern from market participants that the Fed may have, or will, lose control of the inflationary cycle if this trend continues,” said Wes Karger, co-founder and managing partner at TwinFocus. 

Unlike a manager overseeing wealth for a retiree who needs to make their assets last for a certain number of years, TwinFocus is sometimes managing client wealth for hundreds of years into the future. 

“The wealth that we manage is typically wealth that remains in families for generations, so dynasties potentially. In that regard, one of our mandates is to preserve the inflation-adjusted neutrality of the assets that are under our supervision, and in doing so, we need to think about what deleterious effects inflation may have on the purchasing power of each one of our unique families,” said Karger.

The firm’s strategy is to invest in assets that will do well over the next 12-to-24 months if inflation does creep up, but that will also do well if longer-term inflation doesn’t come to fruition.

Here are three strategies they use to hedge against potential inflation. 

Levered real estate with fixed-rate debt

“Generally, if you’re expecting inflation, you want to be a borrower, not a lender,” John Pantekidis, CIO & general counsel of TwinFocus told Insider. This is because borrowers can pay back the debt with money that is worth less than what it was worth at the time it was borrowed. 

Real estate leveraged with fixed-rate debt in areas where there’s population growth and where rents can grow sustainably higher is a favorable inflation hedge — and by the same token, a great investment for clients over the long run. 

“We’ve started to identify and invest in the western part of the country where we think people are moving for quality of life reasons and for COVID. We also made a very large investment last year in the port of Savannah, taking advantage of the industrial real estate move that we think is going to be sustained as well. Specifically, our view is that warehouse properties will do well in port areas for the next 10 years. And we have fixed-rate debt with those types of investments,” Karger told Insider. 

Equities in companies that have pricing power and pay higher dividends 

Leveraging stocks with pricing power means targeting companies that can afford to increase the price of their service or product without affecting demand. That way rising costs will be passed on to the consumer, allowing a company’s profits to continue to grow despite higher than expected inflation. 

For TwinFocus, companies with pricing power that translates into steadily growing profits and appreciating dividend payouts is the sweet spot. 

“From a sector standpoint, we’ve been positive on both utilities, as well as master limited partnerships, which do have those types of characteristics,” says Karger. 

Pantekidis calls for caution when considering utilities because there are geographic areas where regulators may not allow for rate increases, potentially harming investors in an inflationary environment. The key is to choose areas where the local municipalities are amenable to raising utility rates. Two sectors the firm particularly likes are water resources infrastructure and midstream energy-related MLPs.  

The firm has also been shifting to small-cap and medium-cap companies that they think will do better with the reopening of the economy.

Pantekidis says that over the past five years large cap companies, especially those that are growth-oriented, performed tremendously. But 2021 year-to-date has seen a reversion to the mean where smaller-cap and mid-cap companies have done better — especially smaller, more value-oriented stocks. 

Increasing exposures to international markets with strong commodities

Pantekidis says that commodities usually rise in a higher inflationary environment where there’s a weaker US dollar, especially when there is pent-up demand or problems with the supply chain. Looking to certain countries that provide exposure to commodities, such as Australia, is one strategy to capitalize on this trend. 

“So in situations like that, you want to be leveraging the Australian markets. Whether it’s Australian equities, especially the ones that again lever to the commodity sectors down there. But even the Australian dollar, you want to have exposure to the Australian dollar. You want to stay away from other countries that are in the opposite situation like Japan that aren’t necessarily leveraged to commodities,” Pantekidis told Insider.

Karger added that they also look to emerging markets that are commodity-rich, such as Brazil, because their equity markets do well as their companies and currencies become more attractive because of the commodity weighting of their economies. And emerging markets have relatively underperformed other global equity markets. 

The general idea of being a fixed-rate borrower rather than a lender during inflation can also be applied across borders, markets, asset classes, and sectors. 

“That’s why the Austrian dollar has consistently appreciated in the past several months vis-à-vis the US dollar, the yen, and other currencies,” Pantekidis told Insider. 

One commodity Karger warns against in a rising real interest rate environment is gold. Even though it had a great run in 2020, it’s off to a rough start in 2021. This is because as interest rates rise on a real basis the opportunity cost to hold an asset like gold, which does not produce cash flow, increases, making it less attractive compared to other potential cash-flow producing assets. 

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