'Learn from the past to inflation-proof portfolios'

'Learn from the past to inflation-proof portfolios'
Photo: Mikhail Nilov [Pexels]

With the CPI now estimated to hit 11 per cent this autumn, fund managers will need to "seek the wisdom of their elders" to know how to structure portfolios.

This is the view of Henry Cobbe, head of research at Elston Consulting, who said too few investors - both retail and professional - have ever experienced investing amid economic circumstances like these.

He commented: "Today’s generation of managers have not lived through a high inflation regime in developed markets and should seek out the wisdom of their elders and of the past."

"Stable and consistent inflation expectations has been a bedrock of capital market assumptions and return expectations since the 1990s."

FTAdviser previously reported that gold, global equities and residential property (capital growth) annual returns beat inflation in the year to the end of March 2022

For example, in March, while inflation was at 7 per cent, UK and global equities real returns were still going strong at 8.39 per cent and 6.03 per cent, respectively. 

However, after a decrease in returns, coupled with CPI scaling up to 9 per cent, together with increasing global uncertainty, both UK and global equities faltered as major indices dipped into the red in April and May.

When adjusted for inflation, UK and global equities finished down at  -0.28 per cent and -2.6 per cent, respectively by the end of April, according to interactive investor’s ‘Real Returns Ready Reckoner'. 

But as Elston says, with inflation continuing to rise despite moves from the Fed, the EU and the UK to combat it by raising interest rates further, the perceived wisdom that 'cash is a haven; equities are risky' seems to have been turned on its head.

He explained: "For the first time since the early 1970s that’s been turned on its head. Ironically in high inflation regimes, cash becomes a higher risk asset (fails to preserve real value), and equities become a lower risk assets (because the right ones can keep pace with inflation).

"Different asset classes have different levels of inflation resilience over different time frames. It is on this basis that we incorporated a layered approach to inflation protection by combining a range of inflation-sensitive asset classes within our Liquid Real Assets Index."

Alternative choices

As at the end of April, residential property returns had taken a slight fall (see table below), but remained positive at 3.1 per cent when adjusted for inflation.

Gold softened a little but was still the strongest performer since the beginning of the year by far, having real returns of 10.42 per cent as at the end of April.

Parmenion's senior investment manager Simon Molica, said: "There are some asset classes which typically offer inflation protection, such as property, infrastructure, gold and commodities, these are generally real assets in nature.