With inflation on the increase, are you wondering how you can make your money work harder and go further? Here, I take a look at what this rising inflation could potentially mean for you and your pennies.
Rising inflation is the bond market’s worst enemy, according to Rob Pemberton of HFM Columbus, the wealth manager. He says: “It erodes the purchasing power of the income that investors are already being paid from existing bonds, so the price of these bonds falls.”
So what can investors do? The traditional answer is to buy inflation-linked bonds, he says. The only problem is that they have already risen in expectation of higher inflation, although he thinks they are still good insurance if inflation becomes entrenched for years.
An alternative is a strategic bond fund that aims to protect capital in all market conditions.
Only 23 savings accounts out of 697 offer an inflation-busting interest rate
Another possibility, says Ryan Hughes, the head of fund selection at AJ Bell, the stockbroker, is to go for a fund investing in floating- rate high-yield bonds, where the amount paid rises and falls in line with interest rates.
Victoria Hasler of Square Mile Research, the fund research group, says that if none of these options appeals, you could buy an index-linked corporate bond fund.
One attraction is that the interest rates tend to be higher than for gilts, but there are not that many index-linked corporate bonds around. One of the few funds that does invest in this sector is the M&G UK Inflation Linked Corporate Bond fund.
Stock market investments have consistently produced better returns than bonds or cash, and are a good way of protecting your savings against inflation, says Tom Stevenson of Fidelity Personal Investing.
“If you had invested £15,000 in the FTSE all-share index 20 years ago you would now have a sum of £52,965. If, however, you had invested the same sum in a typical UK savings account you would now be left with a paltry £19,916. That’s a difference of £33,049 — too big for any investor to ignore.”
Mr Pemberton says one of the best ways of beating inflation is to invest in equity income funds, where you can enjoy the benefit of reinvested dividends compounding over many years. He says: “We suggest selecting funds that have yields well above inflation, such as Threadneedle UK Equity Income, Artemis Global Income and Newton Global Income.”
He also thinks that so-called real assets, such as commercial property and infrastructure, are a good hedge against inflation. Mr Pemberton likes funds focusing on things such as toll roads and energy storage, where pricing is sometimes linked to inflation.
Rising inflation and interest rates should favour certain sectors, such as financials and commodities, says Michelle McGrade of TD Direct Investing. She suggests investors take a look at funds such as Old Mutual UK Alpha and Investec UK Special Situations, which have built up substantial positions in bank shares.
In the same way, she thinks investing in funds such as First State Global Resources could be a good way to play the expected rise in commodity prices.
Mr Hughes says: “In the long term the best response to inflation is to target companies that have pricing power. They should be able to generate high margins, consistent earnings and robust cash flow, which they can turn into growing dividends, which make up a large part of total shareholder returns.” He says that one fund that invests in quality companies with pricing power is Fundsmith Equity, which has returned more than 150 per cent over five years.
The experts’ picks
Rob Pemberton of HFM Columbus picks Jupiter Strategic Bond. He says: “The managers have proved very adept at protecting investors’ capital by buying bonds of differing time spans and quality to suit a variety of market conditions.” Michelle McGrade of TD Direct Investing goes for PIMCO Global Real Return. She says: “This provides global exposure to inflation-protected bonds.”
Ryan Hughes of AJ Bell selects Artemis Income. He says: “It has been one of the most consistent performers in the income sector. The yield of 4.2 per cent looks attractive.”
Rob Pemberton of HFM Columbus goes for Troy’s Trojan fund. He says: “It is an excellent one-stop shop for inflation-proofing. It has a portfolio of index-linked bonds from the UK and US, high-quality dividend-paying income funds, and some gold.”
Equity investment trusts
Iain Scouller, of Stifel, the stockbroker, selects HICL Infrastructure and Schroder Income Growth. He says: “The HICL trust invests primarily in UK government-backed infrastructure projects. The portfolio has some inflation linkage and the shares yield 4.6 per cent. The Schroder trust has increased its dividend in each of the past 21 years. The shares yield 3.8 per cent.”
Are you still unsure what this means for you? Do you want clarification on a particular piece of this post? Please don’t hesitate to contact me! I’m happy to help.