Rising Inflationary Pressures Mean Trustees Need to Re-examine Their Portfolio Yield and Asset Allocation
The top chart shows that core and overall CPI are both above 2%. The bottom chart shows that the CPE price deflator -- the Fed's preferred inflation measure -- is rising. We're also seeing inflation increase in other countries: the latest inflation figures from Germany, France, the EU and Canada all indicate that energy prices are rising at strong rates. While these increases have not bled into overall inflation measures yet, it's only a matter of time before companies can no longer absorb these cost increases, forcing them to raise prices.
The Prudent Investor Rule (Section 90 of the 3rd Restatement of Trusts) requires trustees to consider inflation when making investment decisions:
e. General requirement of caution. In addition to the duty to use care and skill, the trustee must exercise the caution of a prudent investor managing similar funds, in similar circumstances, for similar purposes. See § 77, Comment b. And see discussion in the Reporter’s Note to this Comment e. In the absence of contrary provisions in the terms of the trust, this requirement of caution requires the trustee to invest with a view both to safety of the capital and to securing a reasonable return. See generally
§ 79 on the duty of impartiality. Safety of capital includes not only the objective of protecting the trust property from the risk of loss of nominal value but, ordinarily, also a goal of preserving its real value--that is, seeking to avoid or reduce loss of the trust estate’s purchasing power as a result of inflation. This objective will also normally tend to protect the purchasing power of the income flow in the future.
Therefore, with inflation rising, trustees would be advised to re-evaluate their overall portfolio return and potentially readjusting parts of the their fixed income allocation.
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