Shift to infrastructure and commodities as inflation hedge

Philip Matthews, portfolio manager for TB Wise Multi-Asset Income, and Mahmood Noorani, chief executive and co-founder of Quant Insight, both warned the same macro uncertainties that dogged 2021 would continue in 2022. 

Noorani commented: "As we move into 2022, macro continues to dominate across asset classes.

"The post-Covid era has seen enormous shifts in economic growth, inflation, and policy. These are very likely to continue into 2022 as policy unwinds, inflation remains a driver and debt levels come into focus."

For this reason, he believes that using quant will become even more "essential" for "identifying regimes shift and uncovering hidden risks and opportunities in the new year".

Covid remains a real economic threat and deflationary forces in existence pre-Covid.Matthews

For asset managers such as Matthews, it is vital to structure portfolios against "persistent" inflationary forces, but he said he remained confident that TB Wise's Multi-Asset Income portfolio could still deliver to investors despite the macro outlook.

He said: "Our portfolios are well positioned to perform against a backdrop of higher inflation and rising rates. We have a high allocation to equities, particularly to financials which are direct beneficiaries of rising rates."

The portfolios also have exposure to commodities, property and infrastructure, to improve diversification across asset classes and act as a hedge.

TB Wise's £82m Multi-Asset Income fund holds the BlackRock World Mining fund, which has benefited from rising commodity prices as well as continued capital discipline in the sector.

Matthews added: "Our infrastructure holdings, such as Ecofin Utilities and Infrastructure, benefit from the structural transition of energy generation and have repositioned their traditional regulatory utility holdings towards countries whose regulatory frameworks incorporate inflation, such as the UK and Italy."

He said the fund's property holdings should be able to mitigate higher inflation.

He explained: "In certain cases, such as Impact Healthcare REIT, rents are directly linked to CPI, while in others we believe inflationary pressures on land and build costs are pushing rents higher, such as with Urban Logistics."

But Matthews was keen to clarify that the fund management group does not want "to build a portfolio purely predicated on the basis economic growth remains strong and inflation proves more persistent than expected.

"Covid remains a real economic threat and deflationary forces in existence pre-Covid, such as demographics, high levels of debt and technology, have not gone away. We will retain a balance within the portfolios favouring those areas where we believe low valuations provide an element of cushion in the event expectations disappoint."

His comments came after the Bank of England - commonly nicknamed the 'unreliable boyfriend' in 2021 - surprised markets at its December meeting by choosing to increase interest rates by 0.15 percentage points to 0.25 per cent.

This was despite concerns over impact the Omicron variant might have on economic growth.  

UK GDP has been widely forecast to increase by nearly 5 per cent in real terms next year, with inflation expected to touch 6 per cent and unemployment at just over 4 per cent. As a result, Matthews said pressures had been building for ultra-loose monetary policy to be tightened for a while.

A similar story is seen in the US, with the US Federal Reserve also dramatically shifting its projections for the direction of interest rates, predicting three interest rate rises in 2022 and a doubling of the pace of tapering its bond purchase programme (quantitative easing). 

simoney.kyriakou@ft.com