Talking Point 

Global inflation puts advisers on alert

  • To assess the impact of inflation.
  • To understand how inflation affects different asset classes.
  • To ascertain how best to structure portfolios.
CPD
Approx.30min

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.”

Index-linked securities are one way of hedging against inflation, but as Adrian Hull, senior fixed income product specialist at Kames Capital told FTAdviser, while this can help with inflation proofing, there are, like short-duration bonds, downsides.

He explains: "Neither asset class is cheap as investors have already future proofed portfolios for such outcomes.

"Despite this rational response it is likely that headline UK RPI will push higher than the whole of the nominal gilt yield curve in 2017 – repeating valuations of 2011.

CPD
Approx.30min
  1. What does Mr Stephens say is not a problem?

  2. What does the FCA call its work into cash savings accounts?

  3. What does Mr Spreadbury call an ideal solution for investors who desire a modestly higher yield and risk profile than cash and government bonds?

  4. Mr Ball believes what can be the catalyst that helps close the earnings gap?

  5. In which year does Cerulli Associates see emerging market fund flows returning?

  6. How does Mr West say inflation protection can be added into portfolios?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To assess the impact of inflation.
  • To understand how inflation affects different asset classes.
  • To ascertain how best to structure portfolios.

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