Should TIPS Funds Be Cutting Dividends Now? (WIW, WIA)

Apparently. Peter Stutz, portfolio manager from Western Asset Management, which runs two closed-end funds (CEFs), WIW and WIA, each with 80% of their portfolio in TIPS, explains. WIA cut its dividend from 0.0656 per share per month to 0.0525 per share per month, and WIW cut its dividend from 0.0688 per share per month to 0.0550 per share per month.

Peter Stutz on the four factors they consider when setting monthly dividends for the TIPS funds:

• The CPI, since TIPS are indexed to the CPI, and both portfolios are 80% TIPS
• Yields in general, since after all, they are bond portfolios
• Credit spreads -- for the remaining 20% of the portfolios that is invested in investment-grade corporates, or emerging market bonds
• Fed funds rate, or in other words, cost of leverage (but the funds are only 37% leveraged, so this is a much smaller factor than say, CPI)

On what he saw:

• CPI had been trending lower through the first half of the year. In June CPI came down to a year-on-year low of 2.5%
• "Real" (inflation-adjusted) yields have remained unchanged (in a tight range)
• Credit spreads have tightened, so the extra boost the funds try to get by investing the non-TIPS 20% of the funds in investment-grade corporates and emerging markets, has diminished
• Fund funds went from 1% to 3.25%

On his near term outlook for US TIPS and inflation:

• The hurricanes have had an impact on oil & gasoline prices. Short term, this is good for TIPS because gasoline will have enough of an effect on the CPI

On his longer term outlook for US TIPS and inflation... "very uncertain; inflation may be higher in the future, but really hard to tell" because:

• Long term effects of hurricanes unknown
• A lot depends on how long energy prices stay at these high levels
• Whether high energy prices pass through to other things in the economy, such as labor costs or material costs
• Fed reaction unknown

Brief Bio of Peter Stutz, Portfolio Manager/Research Analyst: 1997-present Portfolio Manager/Research Analyst at Western Asset Management 1996-1997 Pacific Telesis Group, Portfolio Manager 1993-1996 Wells Fargo Nikko Investment Advisors, Trader University of Chicago, M.B.A. University of Illinois, B.S. The audio.