How to inflation-proof your portfolio
1) Pick the right asset class
Real assets, like gold and property, as well as their related shares, generally do well in periods of higher inflation. Gold, especially, is commonly used but hard for small investors to hold in any form other than jewellery. Maike Currie investment director for Personal Investing at Fidelity International, likes the Investec Global Gold Fund and also the BlackRock Global Property Securities Equity Tracker Fund, which invests in retail, industrial, office and residential property in addition to hotels and real estate service companies.
2) Be specific
There are some companies that do better than others in inflationary environments. Cash generation provides a buffer for a company, enabling it to self-fund its operations through tougher times. And pricing power is particularly important, as the company will be better able to offset rising costs by passing them on to customers. Darius McDermott, managing director of Chelsea Financial Services, likes the Evenlode Income, which invests in this type of company. Infrastructure is also a good bet, as toll roads, for example, have prices linked to inflation. He likes consider First State Global Listed Infrastructure, while the multi-manager team at BMO Global Asset Management use the GCP Infrastructure investment trust.
3) Avoid bonds
Inflation is also usually the enemy of bonds. Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation can be a problem, as it erodes the real return you receive. To mitigate this risk you could invest in a fund like the AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity and is therefore less vulnerable to interest rate changes, or M&G UK Inflation Linked Corporate Bond, which invests in a mixture of index-linked government and index-linked corporate bonds.
4) Let the professionals take the lead
There are a number of multi-asset funds which are currently being tactical about possible inflation: McDermott likes the Investec Cautious Managed fund, which has investments in physical gold and silver and UK and US index-linked government bonds. The team at BMO Global Asset Management are also running with low government bond exposure, across their range of multi-manager funds. The F&C MM Navigator Distribution would suit a medium risk investor.