Rising inflation can threaten the largest stocks in the market, but it does have some potential beneficiaries.
The Horizon Kinetics Inflation Beneficiaries ETF (INFL), launched in January, identifies and groups these names to provide protection for investors in inflationary environments, its co-portfolio manager James Davolos told CNBC’s “ETF Edge” this week.
“The first thing we want to do is … identify an end market that we believe is inflationary, that we commonly refer to as hard assets, a tangible, finite asset that can benefit from price pressures,” said Davolos in a Monday interview.
Then his team looks for companies with “low capital” business models – ones that don’t take high risk or over-spend to make a profit – and with reasonable valuations.
The result so far is promising. INFL has grown nearly 18% since its inception and has accumulated over $ 624 million in net assets under management.
The ETF’s key positions are Charles River Laboratories, Texas Pacific Land Corp., PrairieSky Royalty, Franco Nevada Corp. and Deutsche Börse. It also holds significant positions in Intercontinental Exchange, Wheaton Precious Metals Corp., Archer-Daniels-Midland and Brookfield Asset Management.
“Two areas where there has been little arguing against inflation in the past decade are higher education and healthcare,” said Davolos, INFL’s leading pharmaceutical services company, Charles River Laboratories, also vice president of Horizon Kinetics.
Charles River is helping to accelerate the early stages of new drug development at a lower cost than most other organizations, which as price pressures mount, could mega-cap biotech and pharmaceutical companies, he said.
“They have the facilities, they have the networks, they have the databases where it doesn’t cost them much to get a lot more throughput through their existing system,” said Davolos.
“As demand grows in an inflationary environment, Charles River will benefit from both higher volumes and higher prices, which kind of has that one-two punch … on the plus side.”
The added value of Texas Pacific Land is slightly different. “Truly unique” the company earns royalties on oil and gas production in west Texas and benefits from developments on the land it owns, Davolos said.
In fact, giants like Exxon Mobil, Chevron, and EOG Resources pay Texas Pacific to operate its West Texas oil fields, and other organizations pay it to build pipelines, roads, power lines, or water systems on its land, resulting in cost-effective returns. he said.
It is similar with Franco Nevada, which earns its license fees from precious metal mining, said Davolos. Archer-Daniels-Midland, which processes the world’s crops, should achieve a higher “crushing margin” by imposing higher input costs on its customers, he said.
The stock exchanges should benefit from the “ripple effects” of inflation, said Davolos.
“The Intercontinental Exchange, Deutsche Börse, the CME, they run very large derivatives exchanges that allow people to both hedge and speculate on all of this instability or volatility that could arise as a function of inflation,” said he. “When there’s a few trillion dollars more [in] In nominal terms of derivatives, the exchanges spend very little money to generate this income, and much of that is converted into operating income. “
INFL’s positive track record is likely just beginning, added Davolos.
“I think the long-term trend is still suggesting that fairly strong reflation will eventually turn into inflation,” he said.
The ETF closed less than half of 1% higher on Friday.