Global inflation puts advisers on alert

Inflation protection can be added to clients’ portfolios by investing in long term cash flows that have upward only inflation links. Stephen West

Find me a cash Isa with relatively good ease of access and not requiring a high minimum investment, which pays me more than the estimated 2.8 per cent inflation, and I'll send you a free copy of whichever book happens to be on my desk at the time. 

Add to this the Bank of England has already predicted the average wage increase is set to fall this year, from near 3 per cent in 2015 on average to approximately 2 per cent in 2017.

The latest salary data from consultancy Mercer states:

• 2017 base salary increases for all roles are expected to be between 1.9% and 2.4%. 
• The majority of organisations predict 2017 annual incentive levels to remain similar or unchanged to 2016.

It is clear not only cash savings but also wages are unlikely to beat inflation.So if cash can't help your clients, what can?

Bonds

Seen as lower risk than equities, bonds have traditionally been a good port of call for investors seeking a higher-than-inflation return on their investment portfolios.

The current yield on a 10-year UK government bond (gilt) is 1.27 per cent, according to Bloomberg's daily prices (as at 10 February 2017). This is down 14 percentage points year on year and way below inflation estimates.

While this is not as attractive as the current yield on a 10-year US treasury (T-bill) of 2.4 per cent, and certainly better looking than the 10-year yield of 0 per cent on a Japanese government bond, there are serious macroeconomic risks involved, such as interest rate risk, that could affect the yield.

Moreover, as we have seen in recent months, things can change so quickly investors should beware of a long duration on their bond holdings.

Short-duration strategies are one way that some fund managers and advisers are mitigating the ravages of inflation and the potential interest rate risk on their client's portfolios. 

Last year, Fidelity International launched a Short Dated Corporate Bond fund, managed by Ian Spreadbury and Sajiv Vaid, to keep up with investor demand for a fund that delivers capital growth in a low risk manner.

Mr Spreadbury said: “Short dated credit is an ideal solution for investors who desire a modestly higher yield and risk profile than cash and government bonds, but who consider a conventional corporate bond fund a step too far.

“Short dated corporate bonds exhibit lower drawdown and volatility than their all-maturity counterparts, and their short nature ensures that bonds will be naturally maturing while in the portfolio, providing sufficient liquidity.”