How advisers are inflation proofing portfolios

How advisers are inflation proofing portfolios

The jury is out on whether inflation is going to take off in developed markets but advisers are making sure their clients' portfolios are ready regardless.

Last week (June 16), inflation overshot the Bank of England’s 2 per cent target, rising by 2.1 per cent in the month of May.

The event raised some eyebrows, though many still believe it is a side effect of the pandemic and inflation will eventually find its way to a healthy level.

Jason Hollands, managing director at Tilney, said investors should not be holding large cash balances, as interest rates are still very low.

He added: “[Also] shifting away from sort of nominal government bonds into indexing bonds, or Treasury inflation protected securities.

“[I’d recommend] tilting fixed income towards corporate credit, including high yield, but avoiding long duration."

He explained long duration bonds were much more sensitive to changes in interest rates or inflation expectations. 

“They could be quite volatile in the sort of current environment where everyone's poring over the next set of data.”


Ben Yearsley, investment consultant at Fairview Investing, said within equity portfolios commodities were the way to go.

“There are two reasons for this, one is that lots of the stimulus packages that governments have announced are aimed at infrastructure spending," he said.

“At the same time, you’ve got a shortage of commodities because no new capital expenditure has been spent on them in the last decade, so commodities will be a decent hedge, plus - they’re cheap.”

Adrian Gosden, an investment director at GAM, said shares in financial services firms would benefit most from rising inflation.

“Banks will earn more money with the interest rate moving and that will enable them to report better earnings and pay better dividends,” he said.

“The one thing you want to be really careful with having in your portfolio is the highly rated growth stocks because they have been the beneficiaries of very low interest rates.”

Hollands added that portfolios should also include growth stocks and growth sectors.

“Inflation, essentially, is a source of uncertainty about the future value, the future value of money or an asset. 

“So in the current environment where inflation is on the rise, you can see most of the value stocks and funds do well, because there's a greater focus on this.

“A lot of portfolios, in recent years have very heavily skewed towards growth funds and growth stocks, because that's been the right place to be. They've done incredibly well. But more recently we’ve seen a spring in the step of value managers and I think that is still playing out.”