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BLOG: How to inflation-proof your portfolio

Darius McDermott
Written By:
Darius McDermott

From renewable energy through to general infrastructure investments, there are ways to protect your savings from the ravages of inflation

So far in 2022 I’ve had five text messages from my mortgage provider. Each message has been received the same day that the Bank of England’s interest rate decision has been made public, and each message has informed me that my next mortgage payment will increase.

The same has not happened with my savings account. That is still languishing at 0.01% and a quick look across the provider’s other savings accounts shows I need to tie my money up for a minimum of two years before that rate resembles anything like my mortgage rate.

Short-changed by banks

And I’m not the only person being short-changed. Research published earlier this month showed that the most recent 0.5% increase in interest rates earlier this month had been passed on in full to only two out of 233 easy-access savings accounts in Britain.

The trouble is that when you add the eye-watering inflation figures into the equation, Brits are at risk of having their cash savings wiped out completely. This is because the value of their cash is being eroded by inflation at an alarming rate.

With inflation at 10.1% and the highest flexible cash ISA only offering 1.55%, investors are losing almost 8.5% a year in real terms. At that rate of loss, it doesn’t take long for a savings pot to dwindle.

Spending power is falling

To illustrate just how quickly the purchasing power of your money can fall, £1,000 invested in the cash ISA above would have the spending power of just £915 after one year and £837 after two years. In less than eight years it would have halved, if inflation were to remain this high.

If inflation hits the 18% mark next year, as predicted by investment bank Citi this month, the spending power of £1,000 falls to £835 after 12 months and halves within four years.

High inflation is not something cash savers have had to worry about for a long time, but it is something they need to take very seriously today. They may wish to consider investing in a stocks and shares ISA instead. This comes with a higher degree of risk, but despite the name it doesn’t mean you have to put all your savings into the stock market. There are alternative investments that can be accessed, which tend to display a lower correlation to mainstream investments, like shares.

How to mitigate inflation

With inflation so high it is difficult to protect your wealth completely, but there are a few things you can do to mitigate the impact of rising prices.

One of the best areas that provides inflation protection, in my view, is renewable energy investment trusts. They often benefit from an inflation-linked government subsidy, while higher energy prices also make them an excellent inflation hedge. They are critical to the net zero climate change pledge, which makes them a harder political target than oil & gas companies. However, government taxes or intervention remains a potential risk.

Rather than trying to pick just one, you could invest in the VT Gravis Clean Energy Income fund, which holds a range of these trusts and has a target yield of 4%, which could be attractive to income-seeking investors.

Other generalist infrastructure assets also benefit from inflation linkage. Although not a perfect hedge, a range of infrastructure assets, which can be accessed via infrastructure investment trusts, provide inflation-protected cash flows. Here, First Sentier Global Listed Infrastructure could be an option.

Finally, gold has not been a great hedge so far, but historically it has been a great preserver of capital. Now that inflation is in double digits, it may start to shine once again. One option here is the Jupiter Gold & Silver fund.

Juliet Schooling Latter is research director at FundCalibre