Rising inflation may threaten the largest stocks in the market, but it does have some potential beneficiaries.
Launched in January, the Horizon Kinetics Inflation Beneficiaries ETF (INFL) identifies and groups those names to protect investors in inflationary environments, co-portfolio manager James Davolos told The Washington City Times’s “ETF Edge” this week.
“The first thing we want to do is… identify an end market that we think is inflationary, which we generally refer to as hard assets, so a tangible, finite asset that can benefit from price pressures,” Davolos said in a Monday talk. .
Next, his team looks for companies with “low capital” business models—that don’t take much risk or spend excessively to make a profit—and reasonable valuations.
The result so far is promising. INFL is up nearly 18% since launch and has accumulated more than $624 million in net assets under management.
The ETF’s principal holdings are Charles River Laboratories, Texas Pacific Land Corp., PrairieSky Royalty, Franco Nevada Corp. and Deutsche Boerse. It also has significant positions in Intercontinental Exchange, Wheaton Precious Metals Corp., Archer-Daniels-Midland and Brookfield Asset Management.
“Two areas you’d have a hard time arguing against being inflationary in the past decade are higher education and health care,” said Charles River Laboratories, INFL’s largest holding company, the pharmaceutical services firm, Davolos, also a vice president at Horizon. Kinetics. .
Charles River is helping accelerate the early stages of new drug development more cost-effectively than most other organizations, which could drive mega-cap biotech and pharmaceutical companies into their operations as price pressures mount, he said.
“They have the facilities, they have the networks, they have the databases where it won’t cost them much to get a lot more throughput over their existing system,” Davolos said.
“To the extent that there is more and more demand in an inflationary environment, Charles River will benefit from both higher volumes and higher prices, sort of a one-two punch…on the plus side.”
Texas Pacific Land’s added value is a little different. “Truly one of a kind,” the company earns royalties on oil and gas production in West Texas and takes advantage of developments on the land it owns, Davolos said.
In fact, giants such as Exxon Mobil, Chevron and EOG Resources pay Texas Pacific to operate in its oil fields in West Texas and other organizations pay it to build pipelines, roads, power lines or water systems on its land, ensuring a cost-effective return. said.
It’s similar to Franco Nevada, which earns its royalties from mining precious metals, Davolos said. Archer-Daniels-Midland, which processes the world’s crops, should earn a higher “crushing margin” by sending higher input costs to their customers, he said.
The stock markets should benefit from the “ripple effects” of inflation, Davolos said.
“The Intercontinental Exchange, Deutsche Bourse, the CME, they operate very large derivatives exchanges, which allow people to both hedge and speculate on all this instability or volatility that could arise as a function of inflation,” he said. . “If There’s a Few Trillion Dollars More” [in] fictitious derivatives volume, the exchanges spend very little money to actually earn that income and much of it is turned into business income.”
INFL’s positive track record is likely just getting started, Davolos added.
“I think the long-term trend still points to a pretty strong reflation that eventually turns into inflation,” he said.
The ETF closed less than half of 1% higher on Friday.