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IN THIS ISSUENews Ask the experts07 // Calendar14 // On the move13 //

Q&A17 Features Heckerling Institute19 // Swiss tax22 // Gaining Momentum37 // Comment Neuberger Berman25 // Netplus Capital28 // Diane Harrison30 // April Rudin34

HIGH-NET-WORTH INTERIOR DESIGN CORNER: IMATCHDESIGNERSPAM sits down with Lloyd Princeton, founder of ImatchDesigners, to discuss the world of interior design and how to get quality work done at an affordable priceTURN TO P12

ASK THE EXPERTSMarc Odo, director of applied research, Zephyr Associates, explains the best way to analyze the performance of hedge fundsTURN TO P7

Q&AA fresh start: Greg Anderson,

Princeton Fund Advisors, and Bob Keck, president and CEO of 6800 Capital, sub advisor to the Princeton Futures Strategy FundTURN TO P17

The 47th annual event hosted roughly 3,000 conference goers who heard the latest developments in estate law and the continued fallout from the 2010 Tax Act

Private banking With stricter regulation and more transparency, banks are expected to be more vigilant when it comes to illegal activities and tax fraud

Inflation and your portfolioBrian Hahn of Neuberger Berman explains how increasing inflation affects investments

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FEBRUARY 2013 PAMMAGAZINE.COMProtecting today’s wealth for tomorrow

Heckerling Institute on Estate Planning 2013

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Brian Hahn, managing director, Neuberger Berman explains how increasing

T he U.S. Federal Reserve has moved in unprecedented fashion over the past few years to slash interest rates to historically low levels – helping to keep infl ation in check – and to pump money into the fi nancial

system in an eff ort to spur economic activity. However, during the continuing economic recovery there are concerns that an infl ation revival may be surfacing, or even accelerating.

Accelerating infl ation can take a toll on investors. It decreases the value of the domestic currency in which one holds assets, while also making goods and services more expensive. Additionally, infl ation can take its toll on many investments. For example, fi xed-rate bonds enjoyed a bull market during the recent three decades of low infl ation and interest rates; however, they typically have fallen in price at times of rising infl ation.

Today, investors should consider the reality of higher infl ation, which closely correlates to higher interest rates and can impact portfolio returns. As a result, some investors may want to consider allocating funds to several asset classes that are known for their potential to provide a hedge against infl ation.

INFLATION-HEDGING TACTICSA common strategy for investors to hedge infl ation is by purchasing infl ation-linked investments, such as Treasury Infl ation Protected Securities (“TIPS”). Currently, TIPS appear to carry a high cost, in terms of swapping a promising return profi le from competing assets for a lower-yielding investment that provides a potential hedge against rising costs and prices. Several other asset classes, however, have shown a high correlation with long-term nominal infl ation and as part of an asset allocation can help investors potentially mitigate infl ation risk while still maintaining an attractive return profi le.

Th e types of investments that may serve this purpose in a portfolio include:

Floating Rate Bank Loans: Th ese are generally senior secured debt instruments with fl oating rate

Infl ation and your portfolio: time to recalibrate?

coupons. Th e loans earn a yield that includes both a spread refl ecting credit risk and a fl oating base rate, typically the London Interbank Off ered Rate (LIBOR), which is reset on a regular basis, typically every 30 to 90 days. Th at frequent reset means that these loans carry far less interest rate risk than non-fl oating rate bonds that pay a fi xed interest rate. Because infl ation and interest rates have proven to be highly correlated over time, fl oating rate loans can be a good hedge against infl ation.

Commodities: Commodities are basic goods that can be broken down into fi ve broad groups: energy, precious metals, base or industrial metals, livestock and agriculture. Commodities have shown relatively inelastic supply-and-demand traits: people still need to fi ll up their tanks to drive or purchase food to eat during both infl ationary and defl ationary periods. Moreover, tremendous economic growth in countries such as China, Brazil and India has triggered strong demand for materials to build roads, bridges and homes, thus driving up prices. Because of this demand, prices for commodities have generally been rising. Commodities do not necessarily have a positive correlation with the stock market, but they do have a positive correlation with infl ation, thereby providing a natural hedge against rising prices.

Equities: In some cases, equities can be an attractive asset class for investors concerned with spiraling infl ation. In general, the idea that diversifi ed equities can be an infl ation hedge is generally only applicable over longer time horizons, simply because of the volatility of risk asset classes like equities over short time horizons. Certain types of stocks, however, tend to perform better in a rising infl ation environment than others, mainly because their expense sensitivity to price increases is lower or their revenue sensitivity is higher, which can be supportive of profi t margins. Industries whose share prices tend to correlate positively with infl ation tend to have high fi xed costs and include late stage cyclical sectors such as energy, industrial and materials.

For bond investors, it is important to understand the implications that infl ation and rising rates pose to individual bonds and bond funds (e.g. bond prices tend to fall during times of high infl ation and

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interest rates). That said, interest rate risk can be managed by adjusting the duration or sensitivity of a bond portfolio according to the expected direction of interest rates. Flexible bond management can also reduce overall portfolio risk by opportunistically investing across various sectors with potentially less correlation to movements in U.S. Treasuries.

TAKE STEPSAs previously mentioned, many are concerned that the actions that have been taken over the past few years to stimulate the economy could inevitably result in elevated inflation. While we don’t know

what tomorrow holds, it may be advisable for investors to consider taking steps today to mitigate the impact of inflation on their portfolios.

Brian E. Hahn, managing dwealth a

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