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Investors urged to buy inflation protection early

Investors urged to buy inflation protection early

Advisers should go further than simply helping clients with their investments – protecting the portfolio should also be considered, a fund manager at Insight Investment has said.

David Hooker, who manages the Insight Inflation-Linked Corporate Bond fund, said the current low-inflation environment represented a good opportunity for clients to get “insurance against a future rise”.

However, Mr Hooker said the inflation-linked corporate bond market currently made up only £37bn of the whole £530bn corporate bond market.

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He added that most of this was made up of just six bonds, including Network Rail, Heathrow and Rabobank.

Mr Hooker said: “You cannot make a corporate bond portfolio out of that, so we decided to make up a corporate inflation-linked bond through the derivative market.

“From a portfolio diversification point of view you need to hold a range of assets, and this will give you some protection when inflation protection is relatively good value.”

He said some clients might not worry about inflation, especially with rates so low, but added: “When did Noah build his ark? Before it started raining. And inflation protection is like any insurance, you need to buy it early because the price goes up.”

At the end of May, the ONS announced that CPI inflation had gone negative for the first time on record, with the rate falling to -0.1 per cent.

Bank of England governor Mark Carney has predicted inflation will return towards the 2 per cent target by the end of the year.

This came as the Henderson Cost of Cash report revealed that inflation had eroded UK cash savings by £80bn over the past five years, while since 1990, inflation of 122 per cent far outstripped the 69 per cent return on instant access savings.

Meanwhile, UK equities outstripped inflation sixfold.

James de Sausmarez, head of Henderson’s investment trust team, said: “Inflation may be down at historically low levels right now, but it is not out.”

Adviser view

Mel Kenny, an adviser with London-based Radcliffe & Newlands, said: “Forecasting where inflation will go is a guessing game, and the investor should keep all bases covered and ensure they are in a mixed range of assets.

“Mark Carney has made a lot of predictions in his short time as governor and he hasn’t met all of them.”