4 investment ideas to combat rising prices - how to invest during rising inflation

Is it good to invest when inflation is high?

It can be good to invest during high inflation, but it depends on what you invest in as well as your financial goals and risk tolerance.

One of the effects of inflation is it erodes the purchasing power of money, so leaving cash idle in a savings account means it can lose value over time. By investing, especially in assets that tend to outpace inflation, you can preserve or even grow your wealth in real terms.

The best investments during high inflation will often depend on valuations at the time, and to what extent a more inflationary outcome has already been priced in. However, certain areas – like commodities and raw materials, real estate, and stocks in sectors with strong pricing power – often perform better in inflationary environments. These assets can either adjust with inflation or benefit from rising prices, making them effective hedges.

Precious metals, notably gold, can also do well during high inflation because they tend to hold their value when currencies lose purchasing power. However, gold’s track record is inconsistent. While it has performed well in some inflationary periods, as other factors like interest rates and investor sentiment also influence the price. So, while gold can be a useful part of an inflation-resistant portfolio, it’s best used in small quantity alongside other assets.

However, not all investments fare well. Long-term fixed-income bonds, for example, can lose value as interest rates rise in response to inflation, although high yield areas tend to be less affected. Similarly, holding too much in stable, low-growth stock market sectors can be detrimental. The key is to diversify and focus on assets that either generate inflation-adjusted income or appreciate through strong earnings growth that can outrun inflationary increases.

Investment funds for high inflation

With the possibility of a backdrop of continued sticky inflation here is a selection of funds we believe could do relatively well in their respective areas over the long term – 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 good quality dividend paying shares may offer some inflation protection. In particular, companies that can weather 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 focused on the resilience of companies to grow earnings, and one fund that stands out 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.

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, pharmaceuticals and mining and financials could 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 could provide an extra cushion.

This fund is one option for exposure 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. It is managed using a 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.

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.

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. Personal Assets Trust

For investors seeking steady, less-volatile returns and resilience to inflation through a balance of growth and wealth preservation this investment trust is an option to consider.

The managers’ first principle is protecting against inflation and not losing money in ‘real’ terms – rather than being concerned with relative performance against a benchmark. They blend together four main areas: equities, index-linked bonds, cash and gold, which has proved a resilient combination as returns from these areas often move independently of each other rather than up and down in tandem. However, past performance is not a reliable indicator of future returns.

With a disciplined record of asset allocation and the flexibility to add to equities on weakness, the Trust’s philosophy could resonate with investors wishing to balance opportunity and risk. It is not likely to set pulses racing, but it is the sort of resilient holding that could be considered for the core of a portfolio. However, it is worth noting that as an investment trust there can be additional risks associated with share price volatility at times of market stress.