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How to boost your income as inflation rises

Written by: Paloma Kubiak
Inflation hit a near two-year high of 1% in September, corroding the value of the pound in your pocket. But there could be ways to make money from the inflationary environment.

September’s consumer price inflation rose to 1% – half the Bank of England’s target of 2% – but still the highest rate since November 2014.

And with some predicting it could reach 3% by the end of next year, this would represent bad news for savers who are losing money in real terms.

But is there a way to actually make money in this environment of rising inflation? For fund managers and analysts, the answer is yes.

What type of inflation are we talking about?

For Anthony Rayner, manager of Miton’s multi-asset fund range, it’s important to look at what kind of inflation there is in the economy to determine how investors should play the theme, as well as protect their existing portfolio.

He says that globally, there’s not much inflation so the UK is in “quite a special situation” as it’s not consumer demand driving up prices.

Instead it’s being brought about by the weakness of sterling amid the Brexit aftermath.

“If it’s just driven by the weaker pound, one way to play that environment is to have exposure to exporters such as those in the FTSE 100. BP and Shell tick both boxes in terms of overseas earnings and pressure on oil price.”

Rayner says that if we talk about inflation from fiscal expansion, infrastructure is likely to do well and so he has bought a basket of small positions within this sector as he thinks the UK government is keen to insulate the economy from a hard Brexit.

He lists CRH, Keir Group, Agreco and Ashtead Group, some of which are manufacturers and suppliers of materials for the construction industry, while others aren’t strictly pure infrastructure plays but are related.

For Adrian Lowcock, investment director at Architas, investors need to consider whether inflation is going to be a long-term feature.

“At the moment inflation is going to be driven up in the short-term by the weak pound. But the weak global economic environment and uncertainty caused by Brexit means the weak pound doesn’t look likely to create the all-important wage inflation. So inflation rises are likely to be short lived,” he says.

“The key to investing to protect against inflation is to look for companies and sectors where their assets are not price sensitive.”

Costs passed on to the consumer

Lowcock says investors should look for companies and sectors that can pass on any rises in costs to the consumer.

Tobacco and pharmaceuticals are such examples. “Smokers don’t quit or reduce the amount they smoke so price rises can easily be passed on. Likewise, people tend to absorb healthcare price increases as they are unwilling to cut back on healthcare spending.”

He lists star fund manager Neil Woodford’s CF Woodford Equity Income fund as a good option as the manager has a significant amount invested in tobacco (14%) and pharmaceuticals (32%).

James Yardley, senior analyst and Chelsea Financial Services, also says healthcare should be of interest to investors.

“People still need drugs even if they are 15%-20% more expensive,” he says. “Companies like AstraZeneca and GSK are examples in this sector,” he says.

Yardley adds that individual companies in the utilities and energy sector that could also do well in an inflationary environment include National Grid and Scottish Southern Energy.

“Energy companies tend to do well. While they are heavily regulated, the regulator will allow them to raise prices in line with inflation. So the likes of utilities stocks or even gas companies may be attractive, or a fund like Guinness Global Energy,” he says.

For Andrew Herberts, head of private client investment management at Thomas Miller Investment, companies that can adjust their pricing quickly will be best placed to react to, and even benefit from, inflationary pressure.

He says that traditionally, food retailers have benefited from a bit of inflation, as it enables them to adjust pricing quickly and often in anticipation of actual price rises, helping them to cushion margins.

“This may be more important in these times of wafer thin margins and after a period of food deflation. If they can manage to portray themselves as consumer champions at the same time, they have truly pulled off a coup!

“In that light, Tesco’s highly (and probably deliberately) publicised spat with Unilever over Marmite looks a stroke of genius. This pits one beneficiary of rising prices against another – Unilever’s brand portfolio should be strong enough to push pricing in an environment of higher inflation,” he says.

Lowcock echoes this view, highlighting that consumer staples should also be good in an inflationary environment. “We use bread, butter, toothpaste and washing powder and will buy these no matter what.”

He lists the Lindsell Train UK Equity fund which invests in about 30 stocks and says the managers look for companies with “strong pricing power and strong brands” meaning they can pass on cost increases directly to the customer. The fund has about 10% in each of Diageo, Unilever and Relx.

What about inflation-linked bonds?

For Lowcock bonds, because of their fixed income nature, don’t tend to offer inflation protection and while inflation linked gilts and corporate bond funds exist, “they tend to be forward-looking and largely factored in the inflation outlook in the UK as the pound has been weak for some time”.

In comparison, Herberts  expresses his inflation view through the Standard Life Short Duration Global Index Linked Bond fund, which is managed by Katy Forbes and Adam Skerry.

“The fund is unique for its bespoke composite benchmark, 70% Barclays World Global Inflation Linked (ex-UK) 1-10Yr and 30% Barclays UK Index-Linked 1-10Yr. We have deliberately allocated to a short duration strategy because of the higher sensitivity to inflation breakevens at the short end of the curve.

“This is of most significance when taken in the context of the UK Index-Linked curve which has structurally high duration, and where performance is driven by movements at the long end of the curve.”

He adds that it is important to get the correct blend of inflation-linked bond funds and duration.

“If we expected interest rates to fall, portfolios would then be biased towards an all-maturity fund (because of their structurally higher duration). In this space we utilise Legal & General’s passive range of index-linked bond funds, which we allocate to alongside active managers like Standard Life in order to adjust our exposure to duration in portfolios,” he says.

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