How to protect your clients against inflation

How to protect your clients against inflation

Fund buyers have outlined a number of ways to shelter investments from inflation, as new figures showed the consumer price index has now breezed past the Bank of England’s 2 per cent target.

The consumer price index surged to 2.3 per cent last month, which is the highest level since September 2013, according to figures from the Office of National Statistics released today (21 March). 

The increase in the oil price and the slump in the pound are thought to be the main contributors to the rate increase.

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Adrian Lowcock, investment director at Architas, recommended three funds to help protect against inflation, including John Laing’s Infrastructure fund, Neuberger Berman’s Global Floating Rate Income and the Woodford Equity Income fund.

Infrastructure offers some protection for investors if inflation disappoints because it provides a stable and predictable income with low volatility, Mr Lowcock said, adding Mr Laing’s fund is both defensive and diversified.

While bonds are set to suffer from rising inflation, the investment boss recommended floating rate notes, which are less sensitive to rising bond yields because they are short-dated.

He said Neuberger Berman’s fund was a good one to buy because it relies on a bottom-up analysis of bonds, as well as analysis of the global economy.

Mr Lowcock also advised investors to tap into the UK Equity Income sector, pointing out that many companies can pass on inflation by changing the cost or size of products.

Woodford’s flagship equity income fund, which has now hit £10bn assets, was recommended because of its focus on healthcare and tobacco stocks, which are not particularly sensitive to changes in prices. 

Darius McDermott, managing director at Chelsea Financial Services, said he expects inflation to surge as high as 4 per cent over the coming year, particularly as sterling fell again on the news that Article 50 will be triggered next week.

Yet he said he didn’t expect any drastic change to the interest rate.

Looking at investments, Mr McDermott said cash will be the hardest hit by inflation, but warned bonds will also feel the heat as the rising inflation rate eats into returns.

Yet he advised that investors find a bond fund with a higher yield to compensate for rising inflation, recommending the Aviva Investors High Yield Bond and the Rathbone Ethical Bond fund, which have respective yields of 4.9 and 4.5 per cent.

Investing in equities, he said, could provide a buffer, particularly when it comes to shares in cash-rich companies with pricing power.

Mr McDermott agreed that infrastructure and energy stocks are also a good bet because many of the underlying projects can have prices linked to inflation, recommending funds like First State Global Listed Infrastructure and Guinness Global Energy.

Meanwhile, looking at the bigger picture, Michael Baxter, economics commentator at the Share Centre, described the jump in the index as “worrisome”.

Sterling’s slide after the Brexit vote was one of the main reasons for the rise in inflation, and Mr Baxter therefore warned the UK could have a more serious burgeoning inflation problem than the US and Europe.