Surge in global inflation fuels commodity, blue-chips

NEW YORK (Reuters) - The shine is off traditional inflation hedges like gold and inflation-indexed bonds as investors turn to mutual funds heavily exposed to commodity markets as well as to blue chip stocks with solid earnings.

The resurgence of inflation is sweeping through more than just the world's largest economies in U.S., Europe, Asia, and has supplanted the housing collapse and credit crunch as the latest economic menace.

Already, investors have wasted no time in protecting their portfolios against rising prices. The Lehman Brothers U.S. Treasury Inflation-Protected Securities index has risen more than 13 percent for the year ended May 31, compared with 6.9 percent for the Lehman Aggregate index, the leading barometer of all types of bonds.

While the rise in inflation has been driven by volatile fuel and energy prices, money managers are now expecting inflation to be higher and more persistent in the next several years, and are diversifying portfolios as part of a long-term strategy.

"De-regulation, globalization and strong productivity growth helped central banks to keep inflation low over the past 20 years," Morgan Stanley's asset-allocation committee recently said in a June report.

Now, re-regulation and protectionism are making a comeback and globalization has turned inflationary while productivity growth has ebbed, they added.

COMMODITIES SEEN AS HAVEN

What to do in such an environment? Commodities are among investors' top choice as a hedge against inflation.

Because commodities prices usually rise when inflation is accelerating, as it has recently, they offer protection from the effects of inflation.

"We still believe that commodities are in a secular bull market and it's likely that 5 years from here, people invested in commodities will probably be happy they did so," Mihir Worah, manager of the $15 billion Pimco CommodityRealReturn Strategy Fund, said in an interview.

The first leg of the commodities rally occurred between late 2001 and early 2003 for a 27 percent gain, while the next leg lasted from March 2003 to March 2005 for a gain of 41 percent. The current rally began in August 2007 and still continues for a gain of an eye-popping 52 percent.

"Each leg has been stronger than the preceding one," said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey, adding investors should seek commodities exposure as an insurance policy.

Aside from such commodities funds like Pimco's, there are exchange-traded notes exposed to the commodities market.

James Picerno, editor of The Capital Spectator, a widely followed markets blog, said the iPath Dow Jones-AIG Commodity Index Total Return (DJP) offers exposure to broad commodities benchmarks like the Dow Jones AIG Commodity Index.

The Dow Jones AIG benchmark caps the weights of individual commodities and commodity groups so nothing dominates the benchmark, Picerno said. "That makes it more appealing from a diversification standpoint and it massages any huge exposure to oil and energy, which has proven to be volatile," he said.

For instance, the Dow Jones AIG has a 34.55 percent cap on its assets in energy, mostly oil and natural gas, while the iPath Goldman Sachs Commodity Index Total Return Index has roughly 74 percent of its money in energy.

THE WARREN BUFFETT WAY

Christine Benz, director of personal finance at Morningstar in Chicago, said global investors and baby boomers, too, shouldn't bypass stocks as an inflation hedge.

"A company with a moat is going to have a realistic shot at passing off price increases on its customers because they've got something that someone can't get everywhere else, so customers are willing to pay a premium for it," she said.

Billionaire Warren Buffett swears by companies with "moats," or unique advantages that offer protection from rapacious competitors.

Benz said funds with a big share of moats include the Jensen Portfolio JENSX.O, Dreyfus Appreciation DGAGX.O and the Vanguard Dividend Growth Fund VDIGX.O.

"Those companies with moats are particularly advantageous if you are particularly concerned about inflation," she added.

(Reporting by Jennifer Ablan in New York;)