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Four investment funds to counter stubborn inflation

Inflation can take its toll on asset prices but there are a few things investors can do to counter persistent price rises.

| 7 min read

The pound in our pockets is not stretching as far as it used to. Rises in the cost of living have continued to dominate the headlines, as have the actions of Central Banks tasked with combating it. The Bank of England has so far increased interest rates twelve times in row to try to rein in inflation, and there may be another rise or two from the current 4.5%.

This has affected many people’s financial plans, in some cases drastically. Paying interest on mortgages or loans is more costly, and for savers interest rates have generally improved but still lag runaway prices. Keeping up with the costs of everyday expenditure has been nigh on impossible.

Investments have also adjusted to the new environment and it was a very difficult 2022 for both the main assets class, shares and bonds. When inflation expectations and interest rates increase investors require a higher return from investments to compensate for the additional risk they take. Most investments are in the same boat – values must fall so that investors receive a return aligned with the new ‘risk free rate’.

Going forward it is difficult to say whether inflation will fall quickly or be stickier. Experts are divided and there are a number of factors at play. For instance, if economic growth is stronger than expected then inflation could be more stubborn. Conversely, a weaker economic picture implies less demand and upward pressure on prices. Central banks are also closely watching unemployment. If this falls too low it could lead to higher wages and higher inflation. Finally, the price of oil and other commodities remain influential as they are key inputs into the cost of goods, energy bills and transportation. Overlaid onto these factors, the extent to which higher interest rates curb price rises is uncertain.

Fund ideas to help combat stubborn inflation

With the possibility of a continued inflationary backdrop here is a selection of funds we believe could do relatively well in their respective areas – they should all be considered long term investments meaning five years plus. They are provided for your information but are not a guide to how you should invest. Before investing in any fund please read the relevant Key Investor Information Document or Key Information Document, and Prospectus to ensure they meet with your objectives and risk appetite.

1. M&G Global Dividend

Equity income funds investing in dividend paying shares may offers some protection from re-emerging inflation. In particular, companies that are weathering the storm of higher input costs and a cautious end consumer have opportunities to grow market share and could be in a good position to increase their pay outs going forward.

A selective approach could favour managers who are focussed on the resilience of companies to grow earnings, and one fund that stands out to us is M&G Global Dividend. Since the launch of the fund in 2008 manager Stuart Rhodes’ philosophy of backing companies that grow their dividends while avoiding high yielders whose dividends don’t grow has been largely successful. The fund has an impressive record of increasing pay outs to investors over the longer term.

Given the fund’s well-rounded approach, Rhodes has been able to perform in a variety of market conditions – although it has tended to struggle during periods when very high quality, lower yielding companies have outperformed. We believe it is an attractive proposition for those seeking a rising income from global companies in a challenging environment, or for investors wanting a core global equity fund with a leaning towards more stable, dividend-producing stocks.

2. JOHCM UK Equity Income

UK companies are cheap relative to history and their global peers. The mix of dominant sectors including energy, consumer staples, mining and financials should provide some resilience to inflation and there are generous dividends on offer well covered by earnings. Unlike interest on cash or payments from most bonds, dividends have the potential to grow significantly over time, and although the risks are higher the lower valuations available in the UK market in particular could provide a cushion.

One option for exposure JOHCM UK Equity Income with managers Clive Beagles and James Lowen seeking out fundamentally strong companies at an attractive price, meaning growth opportunities as well as relatively high starting yields. The fund is managed using a yield disciplined approach that has been developed and fine-tuned over 20-years. We like the repeatability of their value-oriented process and the wide mix of industries and companies held. The fund could be well positioned to make the most of a turnaround in fortunes for the UK market and the value style of investing more generally.

3. FTF ClearBridge Global Infrastructure Income Fund

Infrastructure assets tend to provide steady income and often have a certain amount of contractual inflation protection built in. They can therefore potentially provide investors with an attractive, income-orientated return and welcome diversification. The area is also expanding with the transition to net zero carbon calling for huge investment in new, more efficient electricity generation, storage and transmission, not to mention the huge roll out of charging points that the widescale shift to electric vehicles will bring.

The managers of this fund are experienced infrastructure specialists based in Australia and have built an impressive record whilst consistently delivering a decent income yield. The fund invests in companies around the world operating in infrastructure related sub-sectors. The fund is exposed to both regulated assets (gas, electricity and water utilities) and to ‘user pay’ assets (toll-roads, airports, rail and communication towers). Around 90% of underlying revenues in the portfolio are inflation linked, so the portfolio should be relatively resilient in a scenario of higher inflation. However, it may be more challenged if economic activity drops off, particularly in respect of companies with ‘demand-based’ revenues, such as toll road operators and airports.

4. Ruffer Investment Company

This investment trust is designed to be an ‘all-weather’ vehicle for managers Duncan MacInnes and Jasmine Yeo to express their views through a wide range of tools. They combine conventional asset classes – global equities, bonds, currencies and gold – with the use of derivatives strategies that serve as protection to market downturns.

The overall aim is to protect as well as grow, so the balance of assets is designed to pay off in a variety of economic scenarios. However, at the present time the trust is positioned in anticipation of a period of stubborn inflation, which the managers believe has been underestimated by the market. They expect a new market dynamic where the key question has shifted from whether inflation is transitory to whether central banks have the willingness and the ability to bring it back down. The trust could therefore be an important diversification tool for many investors’ growth-biased portfolio elements or, more generally, make a more stable ‘core’ holding in a portfolio.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Four investment funds to counter stubborn inflation

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