Inflation proof your portfolio

Inflation is now at its highest level since December 2014, although it remains below the Bank of England's 2% target. Harry Darke, investment manager at Architas, gives four suggestions of ways to inflation-proof your portfolio

Inflation proof your portfolio

Headline inflation in the UK remains subdued but this shouldn’t lead to complacency. Only four years ago the Consumer Price Index (CPI) was running at 5% per annum, a level that would certainly question the valuation of some traditional asset classes. And the latest rise to 0.5% suggests we may start to see the return of inflation in the UK.

While it’s not a reason to panic, investors may want to consider a degree of inflation protection within their portfolios and not just write it off.

We see four mechanisms to provide some protection against inflation.

Inflation-linked assets

Holding assets that offer returns directly linked to inflation including infrastructure investments, projects such as schools, hospitals, social housing and street lighting.

International Public Partnerships – In the age of austerity, cash-strapped governments wanting to invest in new infrastructure projects require the private sector’s support for funding and development. To encourage this activity, governments provide long-term contracts with pre-agreed payments that are adjusted over time in-line with inflation. International Public Partnership Ltd is a fund that specialises in these public-private partnership projects and has investments in global projects across a variety of sectors including schools, criminal courts and hospitals.

Real assets

Real assets are often tangible investments, such as real estate, and can play an important role in a long-term investment portfolio due to their lower correlation to equities and fixed income, their potentially attractive income and importantly their sensitivity to inflation.

Tritax Big Box – This is a specialist property investment focusing on ownership of modern large-scale distribution centres in the UK. Income is generated through long-term tenancy agreements with blue-chip clients for which the distribution centres provide a business critical function.

Commodities

Over the last half century gold has provided strong inflation protection in various periods. Energy is also a key component of the inflation basket and oil-related investments can capture inflation drivers should positive price momentum build.

iShares Physical Gold ETC – Using the iShares fund you can gain exposure to the physical commodity and the daily price of Gold. Gold has performed well in risk-off environments, as observed in the first quarter of this year. This fund offers a low cost way to access the asset class.

Floating rate investments

If inflation returns the base rate is likely to increase, so investments with returns that increase when interest rates rise are another way to get some inflation sensitivity.  These are generally corporate debt investments with floating rate coupons. And often the best time to buy these is when no one else is, which would be right now.

Starwood European Real Estate Finance Ltd. – The company provides debt finance solutions for commercial real estate investors. The fund is comprised of mortgage loans secured on high-quality properties in the UK and Northern Europe. It offers a potentially attractive regular income driven by debt servicing with payments linked to Libor, which then offers some protection against future inflation.

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