GlobalMay 20 2022

The investments beating rising CPI

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The investments beating rising CPI
Photo: Mikhail Nilov [Pexels]

The latest quarterly returns-after-CPI inflation tracker via Interactive Investor found that while interest rates on cash savings were rising, the average one-year fixed rate paying 1.06 per cent will have delivered a negative real return of -5.94 per cent. 

However, during the first quarter of 2022, gold has boomed in value, with an actual annual return of 19.63 per cent at the end of March, resulting in a real return of 12.63 per cent. 

The cost-of-living crisis has brought focus to the impact inflation has on energy, food and transport bills. This has also created a knock-on effect on the real returns of investments. 

The Consumer Price Index measure of inflation continues to rise with expectations of 10 per cent on the near-term horizon, while the Bank of England's monetary policy committee has been slowly raising interest rates, with the latest rise taking the base rate to 1 per cent. 

Diversification of assets brings better outcomes over the longer term, with investment in markets beating inflationHelen Thomas

Becky O’Connor, head of pensions and savings at interactive investor, said: “It is hard to beat the rising cost of living by reducing spending, but it’s also hard to beat the risk from inflation of real losses when saving and investing, for those looking to preserve the value of their money."

The worst performers were global corporate bonds, being at negative returns prior to inflation at -1.69 per cent and -8.69 per cent, in the year to March 2022. 

In the year to the end of March, Isa accounts belonging to interactive investor, was on average, up by 5.8 per cent, yet in real terms this would equate to return -1.2 per cent. 

The average Sipp account was up 4.8 per cent but down -2.2 per cent after inflation was factored in, over the same period. 

Average annual actual and real returns over 12 months to March 2022, based on 7% CPI annual inflation to end of March:

Asset/product typeAnnual return, end of March 2022Annual return to end of Dec 2021Real annual return after UK CPI inflation, to March 2022Real annual return to end of Dec 2021 
Average easy access cash savings account (interest)0.33% 0.17% -6.67%-5.23%
Average 1-yr fixed rate bond (interest) 1.06%0.59% -5.94%-4.81%
Global equities (MCSI World Index)15.39% 22.9%8.39%17.5% 
UK equities (FTSE All Share) 13.03%18.32%6.03%12.92%
Residential property - capital growth14.3%10.4% 7.3%5%
Residential property - rental yield, gross (to Feb 2022) 4.93%4.98%-2.07%-0.42%
Gold 19.63%-2.87%12.63%-8.27%
Global corporate bonds -1.69%-2.06%-8.69%-7.46%
interactive investor Isa investor performance - average (capital growth and income) 5.8%13.7%-1.2%8.3%
interactive investor Sipp investor performance - average (capital growth and income) 4.8%12.2%-2.2%6.8%

Source: Interactive Investor research, April 2022.

O’Connor also added: “Returns from gold, global equities, UK equities and residential property on average beat inflation in the year to March 2022, but don’t expect this to always be the case. Past performance is never a guide to the future.

"Even gold, which is famed for its inflation-busting properties, can be flighty, and sensitive to all kinds of things, not least the strength of sterling and the US dollar.

“Despite continuing to grow above inflation, global equities and UK equities also experienced the biggest drop of all the asset classes we compared in annual real returns, compared with the previous quarter ending December 2021.

“Choosing investments is rapidly becoming an art in deciding where real returns will be least bad, at least for as long as rampaging inflation is expected to last."

Helen Thomas, financial planner at Financial Planning Corporation, said: "We recommend investors continue to take a long-term view and not make drastic changes to portfolios in response to short-term news.

"While we cannot predict what asset classes will ‘be on top’ in the short term, data shows diversification of assets brings better outcomes over the longer term, with investment in markets beating inflation."

Past performance is never a guide to the future. Even gold, which is famed for its inflation-busting properties, can be flightyO’Connor, Interactive Investor

She added that, by separating savings from investments, their clients do not have to worry about short-term market volatility because they have sufficient cash.

Thomas added: "Their investments are allowed to grow, keeping their purchasing power over time."

Rachel Springall, finance expert of Moneyfacts Group, said: “Inflation is already having a huge impact, but it also means the power of cash is being eroded if savers are not able to get a return on an investment that can beat it.

"However, the stock market is still brimming with uncertainties, so it would not be too surprising to find investors being more cautious or perhaps having an aversion to funds that might leave their cash at risk.

“Fund performance can go down as well as up and the past year has been no exception. There have been notable losses and growth during the past year because of external factors, which is making it challenging to compare funds with more historic past performance.

“On top of this, the pandemic has impacted the mindset of savers over the past two years, so regardless of current events, it’s important to consider advice carefully before entering any arrangement and understanding the risks of investing in stocks and shares.”

calum.kapoor@ft.com