You don’t need to be an economist to work out that the UK, along with many countries around the world, is currently in the grip of a severe bout of inflation.
A look at your weekly shopping bill will probably suffice.
The latest official figures show that, domestically, prices grew by 9.4% in the year to June 2022, their highest rate in 40 years.
Sadly, there’s no sign of the bad news ending any time soon. Recently, the Bank of England (BoE) warned that UK inflation could hit 13% by the end of this year and then remain at “elevated levels” for the whole of 2023.
Against such a gloomy economic prognosis, stock market investing - which always carries risk of losses - is not feasible for everyone. But if you are able to invest for at least five years - and preferably a whole lot longer - it can be an effective way to fight back against rising prices.
To enhance your money-making chances, it’s sensible in the present climate to choose investments with the potential to benefit from a sustained period of high inflation.
Against the double whammy of low growth and steepling inflation – the very conditions currently faced by UK investors - there are certain industrial sectors that have traditionally proved defensive against such an eye-watering economic onslaught.
For example, these include consumer staples - companies producing goods that are always in demand - along with businesses occupying the energy and healthcare sectors.
We’ve asked Juliet Schooling Latter, head of research at FundCalibre, to identify five funds for investors with different risk profiles to consider at a time when inflation is running hot.
Her selections appear below, in alphabetical order, along with the reasoning behind each choice and her overall approach to selecting funds.
Cohen & Steers Global Real Estate Securities
Fund type: SICAV (see FAQs below)
Fund size: £62 million
Target Index: Linked SICAV - FTSE EPRA Nareit Developed Real Estate Index
Annual fund charge: 0.65%
Key points:
- As an asset, property typically holds its value against inflation.
- This is a global fund that can take advantage of variations in regional economic and property sector cycles coupled with the diversity of business models in different countries and sectors.
- The management firm is an industry-leading specialist in real estate securities. This fund invests in the entire global real estate investment trust (REIT) and publicly traded real estate company universe. Analysts look at stocks, which currently include Life Storage Inc. and Prologis Inc. from both an equity and property perspective.
- The fund’s universe includes gaming and casino companies, as well as some property services companies. The latter allows the team to gain exposure to sectors such as the office market, without having to take direct holdings.
Who should invest?
Quite a high-risk fund that wouldn’t suit every investor. But it’s useful for investors considering a safe pair of hands in an asset class that can add good diversification to a wider portfolio. It could particularly suit those looking for a ‘one-stop shop’ for access to such a disparate asset class as property.
Jupiter Gold and Silver
Fund type: ICVC
Fund size: £679million
Target Index: Composite benchmark comprising 50% Gold Price (XAU) and 50% FTSE Gold Mines Index with net dividends reinvested
Annual fund charge: 1.08%
Key points:
- Gold has historically been a preserver of capital in times of high inflation. It is also seen as a hedge against central bank mistakes, a distinct possibility today as major institutions worldwide raise interest rates against a backdrop of slowing economies.
- The fund is unique, investing in both gold and silver bullion as well as gold and silver mining companies. In defensive mode, the fund owns more bullion and gold. In a more bullish scenario, the fund tilts more to miners and silver.
- The fund has low correlation to other asset classes, demonstrating its potential value in a diversified portfolio.
- The fund is sensitive to geopolitical risk and typically avoids mining companies which invest in dangerous parts of the world.
Who should invest?
Almost every investor should consider having a small amount invested in gold - for example, between 1% and 5% of their portfolio - for times when inflation is high and other markets are struggling. At times of economic stress, exposure to a fund such as this can literally be worth its weight in gold bearing in mind there’s the potential for volatile performance. Investors happy to accept higher risk may also be tempted to increase their allocation to this fund depending on market conditions.
LF Ruffer Diversified Return
Fund type: (UK OEIC) UCITS
Fund size: £1.44 billion
Target Index: UK bank rate
Annual fund charge: 0.93%
Key points:
- This fund has the protection of investor capital at its core and aims not to lose money on any 12-month rolling basis. It has a strong emphasis on providing genuine protection in times of market stress.
- The fund itself is relatively new. But the wider Ruffer Investment Strategy, which it’s based on, has proven successful for almost three decades.
- The investment process starts with asset allocation, which is seen as the principal driver of returns. Fundamental analysis is key as well.
- For example, an asset allocation decision may require a bias towards an inflationary-focused cyclical sector, such as energy. The relevant analyst will put forward suitable investment ideas to meet that request. These are subject to further review before a position is then taken in that particular sector.
- The portfolio is currently built for a high-inflation environment with energy stocks, index-linked bonds, and gold all part of the portfolio. Top 10 holdings at 30 June 2022 included BP and Cigna.
- Ruffer likens this investment to “riding a tractor on the motorway, plodding in the slow lane.” The fund will lag if markets are performing strongly, but it will perform when markets become more volatile/uncertain.
Who should invest?
Ruffer is the first to describe the process as “dull”. But it has delivered in numerous market conditions, making it a strong consideration for any investor with a reasonably high level of risk aversion. Investors should be aware that, while the fund has a defensive footing, it does not guarantee the protection of capital in any scenario in the future.
M&G Global Listed Infrastructure
Fund type: (UK OEIC) UCITS
Fund size: £631 million
Target Index: MSCI ACWI Index
Annual fund charge: 0.70%
Key points:
- Infrastructure is a familiar concept nowadays: a ‘real’ asset with good inflation linkage. High inflation makes building new infrastructure more expensive, making existing initiatives all the more valuable.
- Infrastructure is also crucial to our everyday lives: we all need hospitals and roads. There is also the potential for inflation-linked cash flows.
- This fund looks for a balance of growth and income from three key areas of the sector: economic, social, and ‘evolving’ infrastructure. In turn, investments range from anything such as utilities and toll roads to health, education and civic buildings, as well as mobile comms towers and data centres.
- Rather than simply investing in the highest-yielding stocks in this sphere, the manager builds the portfolio by focusing on producing a growing dividend (or income stream). The aim is to yield around 3%-4% from the investments.
- The manager also considers the diversification credentials a new company offers to the dividend profile of the existing fund. A company’s sensitivity to the macro-economic environment also feeds into stock selection and position sizing. Holdings include Enel and E.ON.
Who should invest?
This fund should not be regarded as low risk. But it is worth considering by investors who want to diversify their sources of income, as well as their overall portfolio. The infrastructure sector tends to be less volatile than the wider market.
VT Gravis Clean Energy Income
Fund type: (UK OEIC) UCITS
Fund size: £591 million
Target Index: No specified index. Performance is shown vs the S&P Clean Energy index and the MSCI World Infrastructure index
Annual fund charge: 1.36%
Key points:
- Investing in energy is historically one of the best ways to protect against high inflation. High energy prices and the war in Ukraine have made renewable energy assets even more valuable. They benefit from higher power prices, but subsidy elements are also inflation-linked. The result is a double dose of inflation protection.
- Renewable energy is undergoing mass adoption. This fund taps into the expertise of the Gravis group to create a portfolio of holdings that benefit from the secular move to more sustainable energy demands.
- Assets will include those that derive energy from renewable, zero emissions sources, as well as companies saving energy through efficiency measures. This includes solar, wind and hydro-electric power, as well as energy storage, energy efficiency, bioenergy, geothermal, heat pumps and the smart grid.
- The fund looks to generate an attractive income - it targets a regular income of 4.5% per annum - alongside modest capital growth, from a spread of different projects that should deliver defensive, uncorrelated performance. Typical holdings include Greencoat UK Wind and Clearway Energy Inc.
- The process focuses on future cash flows. The fund’s investment adviser looks at the power output the stock can generate and at what cost. Next, the exposure of this power generation to market forces is taken into consideration. For example, the mix between fixed prices or market prices, and whether there is any embedded link to inflation.
Who should invest?
This fund might appeal to a range of investors. These include those that are environmental, social and governance minded, as well as those either requiring an income from their investments, or looking for diversification in a wider portfolio. The fund is expected to offer defensive characteristics as it is targeting lower volatility than global equities and it has low correlation with more traditional asset classes. While all of this should lower the risk profile of the fund, it does operate in quite a narrow universe, meaning there is some concentration risk.
Methodology
FundCalibre’s Juliet Schooling Latter says the company’s four-step process begins with its proprietary quantitative screening tool, AlphaQuest: “This basically strips out the impact of market movement on a fund’s performance to identify the part of returns that is attributable to fund manager skill. It then predicts the likelihood of the manager repeating that performance over the next 12 months.”
She adds that fund managers who pass the AlphaQuest test are then subject to further qualitative analysis: “Our research team will interview the fund manager face-to-face to better understand and assess how their investment process and style gives them an edge over other managers.
“When we meet a manager, we identify their investment philosophy and drill down into their portfolio to check that it is consistent with that philosophy. We look at the team they have behind them and whether they have any constraints.”
Once an analysis has been completed, the research is subject to peer group review. Funds whose managers are thought to be the most skilful are awarded an ‘Elite’ rating.
Frequently Asked Questions
What is inflation?
Inflation takes place when prices rise while reducing the buying power of a currency, such as pounds or dollars, in the process. You can see the effect of inflation by using a tool such as the Bank of England’s inflation calculator. Plug in a figure in pounds from 1949 onwards and see what the equivalent value is today.
Why is inflation a problem?
In the UK, consumer price inflation soared to 9.4% in June 2022, its highest level in 40 years. The latest increase has worsened the cost-of-living crisis faced by millions of UK households because rising prices gnaw away at the purchasing power of people’s incomes.
The effect of inflation on your finances depends on your individual spending habits. Your personal situation may be impacted more – or less – than the headline rate of 9.4%.
To tackle soaring UK inflation, the BoE recently raised interest rates to 1.75% - the sixth upward move since December 2021.
Why is inflation troubling for investors?
As well as squeezing disposable income and eating away at the spending power of cash, inflation and the response of central banks across the globe to tackling it - namely by hiking interest rates - are the main factors looming over financial markets.
Globally, the aggressive tightening of monetary policy has caused carnage for so-called ‘growth’ sector stocks whose valuations have sunk dramatically since the start of the year. Growth stocks tend to perform best when interest rates are low and when economies are starting to heat up.
Closer to home, the UK equity market, which is skewed more towards ‘old economy’ sectors such as financials, energy and consumer staples that churn out dividends, has proven more resilient than most other developed markets.
Dividends are distributions to shareholders, usually paid out in cash, that are met out of a company’s earnings.
What can investors do about inflation?
In times of lower growth and high inflation, sectors that have traditionally proved defensive include consumer staples, health care and energy. These are well represented among the largest UK listed companies, with consumer staples representing 19% of the MSCI UK index, with healthcare and energy at 14% and 13% respectively.
Precious metals, such as gold, and property are also regarded as hedges against inflation. The funds selected above have specifically been chosen with a backdrop of high inflation in mind.
What is an investment fund?
An investment fund is a financial vehicle, also referred to as a collective or pooled arrangement, that aggregates the money contributed by a group of individuals to invest in a range of assets including stocks and shares, bonds, property, commodities and cash.
Investment funds are managed by stock market professionals who may specialise in a particular asset class, region (eg, UK, Europe), industrial sector, or a combination of all three.
Investment funds provide people with exposure to the stock market that they may otherwise have found difficult to access. They also help diversify investments.
Investment funds exist under a variety of different acronyms including, OEIC (open-ended investment company), SICAV (société d’investissement à capital variable), UCITS (undertakings collective investment in transferable securities) and ICVC (investment company with variable capital).
In each case, the broad idea of a pooled accumulation of money created by the contributions of multiple investors remains the same.
Always be aware that stock market investing involves risk and is not suitable for everyone. Before you even consider taking the investing route, it’s important to work out your financial goals. Look to build up a ‘rainy day’ cash fund equal to at least three months of your usual outgoings before taking the investment plunge.
How do I invest in funds?
There are several ways to start investing, including, opening an investment account on your own, choosing a robo-adviser, or delegating your investments to either a wealth manager or financial adviser.
Pay special attention to fund charges and administration fees as these will ultimately bite into the performance of any investments that you make.
You can find out more here about investing for beginners as well as how to buy stocks and shares.
What does it cost to invest in funds?
It’s nigh-on impossible to guarantee returns from stock market-related investments.
But investors can tilt the table in their favour by paying as little as possible for each trade they make and keeping other charges to a minimum. You can find out more here about weighing up investment fees and administration charges.
The inflation-beating funds identified above include an annual fund charge. The idea is to produce a standardised method of comparing the costs of funds. The charge gives an indication of a portfolio’s annual running costs and comprises the fund manager’s fee, along with administration, marketing and regulatory costs.
For example, a £1,000 investment in a fund with an annual charge of 1% will cost £10 per annum. Bear in mind that admin/dealing charges may also apply depending on how the fund was bought – direct from a fund provider, say, or via an investment platform or trading app.
