Buy 'Real Assets' to Hedge Inflation - TheStreet

NEW YORK (TheStreet) -- Investors concerned about inflation ought to stock up on real estate investment trusts, pipeline master limited partnerships and energy stocks, according to Michael Finnegan, who helps oversee the Principal Diversified Real Asset Fund (PRDAX) - Get Report.

The mutual fund, which was started in March, is geared toward investors who expect inflation to accelerate. Owning so-called real assets, such as REITs, tends to thwart the effects of inflation.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Are you worried about inflation?

Finnegan:

We're quite worried when we look out long term. Shorter term, there's still a debate going on whether it's inflation or deflation. Unemployment is fairly high, but it's probably not a big risk in the next year or two. But looking out long term, we're actually quite concerned about inflation.

You have positions in different asset classes, including TIPS. Are you getting paid enough on TIPS these days?

Finnegan:

There's a very important, strategic role for TIPS in this portfolio. They are one of the most effective inflation hedges when you think about the different types of inflation-protected assets. The downside to owning TIPS is the returns or yields can be low, particularly at a time when there is a heightened fear of inflation. And it does give you some volatility around real assets, but then again, they are one of the most effective inflation-hedging strategies out there. So they're a necessary part of this fund.

You hold REITs such as Simon Property Group (SPG) - Get Report and Boston Properties (BXP) - Get Report. Is all the bad news "baked into" commercial real estate?

Finnegan:

Yes, I think so. But again, the way that we designed this fund was more from a strategic bent in trying to identify asset classes that are positively correlated to inflation. And when we look at the behavior of REIT returns, and you look underneath the covers and understand that rents often get tied to inflation. Therefore, REIT cash flows get tied to inflation, so long term, they're a pretty good inflation hedge.

There's a lot of downward pressure on energy stocks due to the BP (BP) - Get Report oil spill. You own energy companies. Are you worried?

Finnegan:

Not long term. We've obviously seen the energy stocks, even some natural-resources stocks, take a bit of a hit over worries about long-term growth. But again, these types of stocks based on commodities tend to be very good long-term inflation hedges. And so, long term, there's definitely a very important role for those in this portfolio.

You have positions in master limited partnerships, or MLPs. Why are these good inflation fighters?

Finnegan:

It really traces back to the business models around the pipelines. Within the MLP space, we're focusing on the mid-stream assets, which are pipelines. And because pipelines essentially operate as monopolies, they're regulated by the Federal Energy Regulatory Commission. As part of that regulatory oversight, they're allowed to adjust their revenues every year, the tolls that they charge to move commodities through the pipeline, by the producer price index. So their cash flows have a natural tie to inflation. Pipelines themselves are also long-lived real assets.

-- Reported by Gregg Greenberg in New York.

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Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.