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Three inflation-beating funds for your ISA

Written by: Darius McDermott
Inflation jumping to 2.9% in August underscores just how tough things are for cash savers right now.

The average easy access cash ISA currently offers an interest rate of 1%, three-year fixed rate cash ISAs are slightly higher around 2%, while money left in the bank is languishing at close to zero.

If inflation remains this high for the next three years, £1,000 in a cash savings account could be worth as little as £920. That’s an 8% fall in the value of a ‘safe’ asset.

So what can investors do to beat inflation? Fortunately, there are a number of options out there for those who are willing to step away from cash and move into bonds, shares or ‘alternatives’, such as property and infrastructure. There are opportunities across asset classes to grow your capital and receive an income stream at the same time.

Here are three funds for your ISA that have the potential to offer inflation-beating returns…

City of London Investment Trust

In the equity income space, City of London Investment Trust would be our pick for an investor who is looking for solid returns and dividend growth potential. The investment trust has a yield of 3.9% and a fantastic record of raising dividends over more than 50 years. City of London Investment Trust’s share price has risen by 67.6% over the past five years.

TwentyFour Dynamic Bond

The bond market can pose challenges for investors because the income that you receive from a bond is fixed, which means high or rising inflation erodes returns. There are three ways that bond managers can counter this.

The first is by holding inflation-linked bonds, making sure to buy in when they are attractively priced. The second is to buy bonds that are close to maturity, which means there is less of a question mark about whether the income stream will be eroded. Finally, select a bond fund that pays a high yield to provide a cushion against rising inflation.

Fortunately, there are a number of bond funds with excellent track records and attractive yields to boot. TwentyFour Dynamic Bond, which invests across the fixed income market, is a prime example. It has a 4.8% yield and has returned 41.8% over the past five years, far ahead of 27.3% by the average fund in the Investment Association’s (IA) sterling strategic bond sector.

First State Global Listed Infrastructure

Our final pick is First State Global Listed Infrastructure. We like it because infrastructure assets are able to increase their prices over time. For example, toll roads typically raise their prices in line with inflation.

Infrastructure assets also generate predictable cash flows and therefore have defensive characteristics regardless of where we are in the economic cycle. The fund invests in listed infrastructure companies and has returned 112.4% over the past five years, far ahead of a gain of 84.6% by the IA global sector average.

Even though inflation is rising and households are feeling the squeeze, this doesn’t mean your savings have to as well.

These are just three examples of funds with the potential to generate returns ahead of inflation; the good news is there are many more out there for savvy savers.

Darius McDermott is managing director of Chelsea Financial Services

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