Inflating expectations

If inflation spirals upwards, which investment companies could offer attractive safe havens?

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If inflation spirals upwards, which investment companies could offer attractive safe havens?

Tyrecompressed

Andy Haldane is worried. The chief economist of the Bank of England believes the UK may be on the verge of a nasty and unexpected spike in inflation. Central bankers and governments are throwing out money in order to drive recovery from Covid-19, he points out, but the early signs are that many economies are bouncing back more quickly than from previous setbacks such as the global financial crisis. In which case, inflation may spiral upwards.

With the rate of inflation in the UK currently standing at just 1.5%, that might sound alarmist. But investors should at least be thinking about how they might mitigate the dangers of inflation. Rising prices traditionally spell bad news for investors in cash and fixed-income assets, since inflation erodes the value of their capital, but can undermine some equities too.

The investment companies industry could be an attractive safe haven to consider during a period of higher inflation, offering a range of different approaches.

Take equity income funds, for example. The sector’s long-term track record of raising income pay-outs to investors year after year – see the AIC’s list of “dividend heroes” for the best examples – looks especially attractive if you are looking to protect the real value of your earnings.

Beyond equities, moreover, the investment company industry comes into its own, offering funds that provide exposure to a broad range of alternative assets that are normally unavailable to retail investors. Some of these funds offer excellent inflation protection characteristics.

Research published by the broker Peel Hunt in March identified no fewer than four groups of investment companies to consider in this regard.

One option is infrastructure investment companies. These invest in real assets that generate rents or returns which are guaranteed over an extended period, often with an automatic link to inflation. Often, these guarantees are underwritten by governments, which provides an additional level of security to go alongside the inflation protection.

Renewable energy funds, one subset of the infrastructure asset class, look particularly attractive, some analysts argue. These funds are especially closely linked to inflation, with policymakers offering strong backing in order to encourage the switch to greener energy.

Elsewhere, Peel Hunt’s second suggestion is the property sector, another area of the market underpinned by real assets. It points to a number of funds investing in commercial property where rental agreements are linked to inflation, including in sectors such as logistics and healthcare.

A third option could be gold, which has long been regarded as the traditional hedge against inflation because the precious metal holds its value over time. Funds including BlackRock World Mining Trust and Scottish Investment Trust all hold as much as 25% of their portfolios in gold itself or in equities related to gold such as mining companies, Peel Hunt points out.

Finally, do not overlook flexible investment companies. These funds have a remit to invest across a broad spectrum of assets, often with a specific mandate to protect the real value of investors’ capital. Funds in the sector can invest in everything from inflation-linked bonds to bitcoin.

There are no certainties in the current market environment. Andy Haldane certainly is not alone in worrying that inflation now has the potential to get out of hand, but there are plenty of well-respected economists who take a different view. Still, if prices do start to rise, investors and their advisers at least know where to look for plenty of choices about how they seek protection.