On the hunt for inflation protection?

David Prosser explores the asset classes which can shelter investors from inflation and how investment companies can allow access to them.  


7% and still rising. UK inflation now stands at a level not seen since 1992 and economists are divided on how much pain there still is to come; some forecasters now expect the inflation rate to hit 10% over the next six months.

Amid this spike, the search for inflation-beating investment returns feels even more urgent. Cash assets have been losing money in real terms for years now, but with inflation at current levels, it is difficult to know where else to look to preserve the value of wealth. Stock market volatility only adds to the uncertainty.

In that context, it was interesting to see a recent Daily Telegraph article pinpointing six potential asset classes to consider for protection against inflation – and in each case, investment companies provide the easiest route in.

The commodities market, where the surging price of raw materials is a major driver of the current bout of inflation, topped the newspaper’s list. In which case an investment company such as BlackRock World Mining offers an accessible way into an asset class that investors would otherwise struggle with.

Similarly, gold is often regarded as the classic inflation hedge, but most investors don’t feel comfortable buying the precious metal itself (though gold dealers do make this more straightforward than is often realised). Here too the BlackRock fund could be useful, but mixed asset funds such as Ruffer Investment Company, which focus on capital preservation, also offer increasing gold exposure right now.

Or what about infrastructure? As with gold, the tangible nature of infrastructure assets – road and rail networks, say, are real things, rather than creations of the financial markets – can offer respite during inflationary periods. Again, it is investment companies that are opening up this asset class, with around ten funds now offering a managed exposure to different types of infrastructure.

Index-linked gilts are another option worth considering. They pay an income that is explicitly linked to the inflation rate, which effectively confers automatic protection on the holder. One option is to buy linkers directly, but funds such as Capital Gearing Trust also invest in these assets.

Property, another tangible asset, provides a fifth option for those seeking shelter from higher inflation. While residential property comes with difficulties attached – including unfavourable tax treatment for investors – commercial property can be a very effective inflation hedge. In some cases, the leases on such properties even provide for rental increases linked to inflation. Investment companies such as Supermarket Income REIT and Secure Income REIT are one way to access this sort of insulation.

The final asset class on the Telegraph’s list of potential inflation beaters is more problematic. Digital currencies such as Bitcoin continue to attract interest from investors though attempts to portray them as “digital gold” are not based on a great deal of evidence that they provide the sort of inflation protection traditionally associated with the real thing. Still, for investors attracted to Bitcoin and its counterparts, a managed fund might provide some reassurance in a market that has seen very significant volatility. Ruffer is one investment company that has taken positions in the bitcoin market.

Why are investment companies a common theme throughout this disparate range of asset classes providing potential protection from rising inflation? The answer is that the structure of an investment company makes these funds uniquely well-suited to investing in asset classes where liquidity may be an issue.

In areas such as infrastructure and property, for example, the underlying investment can be difficult to trade, particularly at speed. But the daily dealing that investment companies offer through their stock market listing means this is not a problem for investors; they can get in and out of the fund at will.

In fact, investment companies have a long and proud history of investing in a much broader range of asset classes than other types of fund. For investors and advisers who believe these asset classes are now the best place to shelter from inflation, investment companies will often be the first port of call.