Does your ISA need inflation-proofing?
According to the latest Bank of America survey of fund managers*, Covid-19 has slipped to third place on their list of worries. Instead, higher-than-expected inflation has become the number one concern.
So as the end of the tax year draws near, do investors need to consider inflation-proofing their ISA portfolios?
Is inflation finally coming back?
Having been in a disinflationary environment for the past 40 years, inflation is expected to rise on the back of unprecedented levels of combined monetary and fiscal stimulus from governments and central banks around the world, and the likelihood of a strong economic rebound as Covid lockdown measures are withdrawn.
But, as M&G Investments pointed out recently, the powerful forces that have kept inflation low for the past few decades – such as globalisation, ageing populations and technology – are unlikely to reverse overnight. The potential long-term economic damage caused by the pandemic could also have a deflationary impact if unemployment remains high.
With both inflationary and deflationary forces to consider, it is anyone’s guess as to which direction inflation will head in the long term, but clearly people are worried. Therefore, it may be prudent for investors to include at least some inflation-linked protection within a well-balanced portfolio.
Four ways to inflation-proof your ISA
First Sentier Global Listed Infrastructure
Up to 70% of investment assets owned by listed infrastructure companies have an effective means of passing through the impact of inflation to customers**, making this sector a good way to add some inflation-proofing to a portfolio.
The added benefit today is that governments around the world have also committed to ‘building back better’, so projects in this sector are also likely to increase. First Sentier Investors has been one of the pioneers in providing access to this asset class and the managers invest in real infrastructure assets with barriers to entry and pricing power.
Jupiter Gold & Silver
Commodity prices typically rise when inflation is accelerating, so this asset class can offer some inflation protection as well. Gold, for example, has monetary backing, while silver also has a store of value and is further boosted by its industrial use. Other industrial metals like cobalt, copper and lithium are all huge drivers of production and are particularly attractive given the current infrastructure drive and global plans to tackle climate change.
Jupiter Gold & Silver invests in both physical gold and silver bullion, as well as gold and silver mining companies. Its low correlation to other asset classes also demonstrates its potential value in a diversified portfolio.
Low and rising inflation is good for equities but anything above 3% can be damaging, so it pays to think about the type of equities you are invested in in an inflationary environment.
Companies that have the ability to pass price increases onto customers are one example, while cyclical stocks – those that benefit from an improving economic environment – are another. Schroder Income is a deep value-driven fund that invests in companies valued at less than their ‘true’ worth and waits for a correction. It currently has more than half the portfolio invested in financial, energy and consumer-led companies***.
Man GLG High Yield Opportunities
While inflation is generally bad for bonds, the higher income paid by high yield bonds, coupled with the fact the companies that issue these bonds in tend to do better in an improving economic environment, can mean that this part of the fixed income asset class is less impacted by rising prices.
Man GLG High Yield Opportunities is an unconstrained, global high yield bond fund. The manager is ably supported by a team that conduct a rigorous analysis of every potential holding and their ability to meet debt obligations. It has a current yield of 6.8%***.
*Bank of America monthly survey, conducted among market professionals managing £430bn worth of money, March 2021
**First State Insights: Infrastructure as a hedge to inflation – May 2018
***Source: fund fact sheet, 28 February 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
Juliet Schooling Latter is research director at FundCalibre