Page 79 - Ray Dalio - Principles

things from a higher level, where we could make novel,
creative connections that produced innovations for our clients.

DISCOVERING INFLATION-

INDEXED BONDS

Around this time, I had dinner with David White, the man in

charge of the Rockefeller Foundation’s money. David asked
me how I would engineer the foundation’s portfolio to produce
a return that was 5 percent above the U.S. inflation rate. I
answered that a portfolio of leveraged foreign inflation-
indexed bonds with the currency hedged back to U.S. dollars
should deliver exactly that. (The bonds needed to be foreign
because there were no U.S. inflation-indexed bonds at the

time, and they needed to be hedged to the dollar so there
would be no currency risk.)

Thinking about this later, I realized that we could create an
entirely new and radically different asset class, so Dan
Bernstein and I researched such a portfolio more closely.
According to our analysis, this new asset class would perform
even better than we’d thought. In fact, it would be uniquely

effective because we could engineer it to have the same
expected return as equities but with less risk and with a
negative correlation with bonds and equities over long time
frames. We showed this research to our clients and they loved
it. Before long, we became the first global inflation-indexed
bond manager in the world. In 1996, U.S. Treasury deputy

secretary Larry Summers began looking into whether the U.S.
should issue its own inflation-indexed bonds, and because we
were the only manager with a portfolio of such bonds, he
called us in as experts.

Dan and I traveled down to Washington to meet with
Summers, his Treasury colleagues, and a number of

representatives from well-known Wall Street firms. We were
late (punctuality isn’t one of my strengths) and the doors to the
big meeting room at Treasury were locked. I wasn’t going to
let that stop me, so I knocked until someone opened it. It was a