Cumberland Advisors, a Vineland, N.J.-based firm is expecting a long term increase in CPI, and has been moving out of seven- to 20-year traditional treasuries and into inflation-indexed treasuries. David Kotok, Cumberland's cio, says he had been effecting a gradual shift until the Federal Reserve's surprise rate cut in January. Since then, he has been moving into TIPS to the greatest extent that he can, within the objectives that his clients have established; the firm manages several hundred accounts, largely for high net worth individuals.
Kotok estimates that he had $40 million in TIPS December 2000, and now, with his allocation shift nearly complete, he estimates that slightly over half of the $250 million he manages is in TIPS. He says he typically uses the Lehman Brothers Government Intermediate Index as a benchmark.
Kotok sees the CPI rising over the next several years because he says monetary and fiscal policy in the U.S. and worldwide has or soon will shift to stimulate economic growth. Also, he says that though a strong dollar has kept inflation down, he doesn't see that trend continuing. "The current account deficit is the highest it's been in modern American history. We're getting the benefit of about 70% of the rest of the world's savings. Those are unsustainable long-term levels." As a result, Kotok says he doesn't want to own conventional long-term, dollar-denominated bonds.
In addition to the roughly $125 million in TIPS, Kotok has about $62.5 million each in taxable municipal bonds and federal agency paper. He says the types and maturities of these investments vary widely according to his clients' investment objectives, though he likes Tennessee Valley Authority as agency paper because it "has no cloud over it," unlike Fannie Mae and Freddie Mac, regarding their GSE status.
