One of the most efficient ways to approach this issue is to make a long-term strategic allocation to assets that typically benefit from inflation. This includes investment in liquid assets, such as commodities, real estate investment trusts (REITs) and Treasury inflation-protected securities (TIPS):

Commodities are tangible assets that have historically performed well in a high inflation environment because many are included in the inflation calculation. From FY1984 to FY2013, commodities as measured by the S&P Goldman Sachs Commodity Index (GSCI) returned 23.32 percent when HEPI was above average, compared to -3.9 percent when HEPI ran below average.
REITs are companies that act as investment agents and specialize in income-producing real estate. There are three distinctive types of REITs: equity, mortgage and hybrid. For purposes of providing inflation protection, equity REITs have considerable benefits to offer investors. From FY1984 to 2013, equity REITs generated returns in excess of inflation 73 percent of the time.
TIPS are bonds issued by the Treasury Department and backed by the U.S. government. TIPS are similar to nominal or “normal” U.S. Treasury securities, but have the added benefit of interest payments that adjust to changes in the U.S. inflation rate. It is important to note that TIPS use CPI when calculating the inflation adjustment. However, HEPI and CPI have a 50-year correlation of 0.88, signaling that the two measures move in tandem a majority of the time.

Despite running at below-average levels for 20 years, inflation continues to harm university portfolios and slowly erode purchasing power. Akin to buying homeowners insurance before a house fire starts, the value of owning an inflation hedge is greatest before the price of the hedge goes up—that is, before an increase in the inflation rate.

Instant Insights /

How colleges and universities can guard against inflation

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