CHICAGO, March 22, 2000 (PRIMEZONE) -- Ibbotson Associates today announced the results of a new study by Peng Chen and Matt Terrien entitled TIPS as an Asset Class. This study models Treasury Inflation Protected Securities (TIPS), a relatively new investment vehicle, as an asset class and explores the implications of introducing them into a balanced portfolio.
TIPS, long used in the U.K., Israel, Canada and Australia, are the U.S. term for inflation indexed bonds-a bond that's principal is adjusted to the rate of inflation. In the U.K., inflation indexed bonds make up 17% of the total government debt and 50% of fixed income held in pension funds. In the U.S., however, TIPS make up less than 2% of the treasury's total outstanding debt. Low liquidity in the U.S. market has deterred institutional investors, but created a buying opportunity for individual investors.
TIPS have a low correlation to equities, even lower than traditional bonds. Being inflation indexed, TIPS also provide a hedge against inflation. These two attributes create a uniquely low-risk investment vehicle.
Because TIPS are inflation indexed, investors frequently underestimate their yield-TIPS currently have a higher real yield than bonds. For example, long-term bonds currently have a nominal yield of 6.56%* and TIPS have a nominal yield of 4.3%*. However, when one factors in 2.5%** inflation, long-term bonds have a real yield of 4.06% while TIPS remain at 4.3%.
The reduced risk and solid real returns of TIPS can significantly enhance the risk/return ratio of an individual's balanced portfolio. A portfolio that was 60% S&P 500 and 40% long-term bonds, for example, would have had a real return of 7.43% over the last 30 years and produced a standard deviation of 13.09. If one had introduced TIPS into the mix and reallocated the portfolio to 65% S&P, 20% long-term bonds and 15% TIPS, the portfolio would have returned 7.46% over the last thirty years with a standard deviation of 12.52-increased return and decreased risk.
"What we did in this study that was unique was to actually create the bond series that we wanted to model. Although inflation-indexed bonds have existed in other nations for a number of years, they weren't auctioned in the U.S. until 1997. A lack of historical U.S. data posed a problem for modeling. So, to analyze the expected return, standard deviation and correlation coefficients of TIPS with other asset classes we first had to create an inflation indexed bond series based on historical inflation and Treasury bond yield data," said Peng Chen, Senior Consultant at Ibbotson Associates.
Mr. Chen added, "TIPS possess unique characteristics that are not available directly through any other investment vehicles. They should be considered when constructing a long-term asset allocation policy."
-- Source: February 16, 2000 Wall Street Journal -- Source: December 1999 Federal Reserve Bank of Philadelphia
About Ibbotson Associates
Ibbotson Associates, founded by Professor Roger Ibbotson in 1976, is the world's leading authority on asset allocation, providing products and services to help investment professionals make the best asset allocation decisions for their clients.
The company's business lines include consulting and research; investment forecasting, planning and analysis software; educational services ranging from on-site workshops to computer based training; and a widely used line of presentation materials designed to educate clients on asset allocation concepts and investment principles. With offices in Chicago and New York, Ibbotson Associates fills a growing need in the finance and investment industry for an independent, single source provider of investment knowledge, practical application expertise, leading edge technology, educational services and sales presentation tools. Ibbotson markets its integrated product line of investment analytical tools and services to institutional money managers, plan sponsors, and consultants for quantitative analysis, high level decision making and presentations. The company's clients also include financial planners, brokers, mutual fund firms, private bankers and small money managers.