3 fund ideas to help beat inflation

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All information is correct as at 30 April 2022 unless otherwise stated.

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The Bank of England has two main objectives. It aims to support economic growth and control inflation in the UK. Over the longer term, it’s done a reasonable job keeping year-on-year inflation close to its 2% target. After years of relatively low inflation though, it’s come back with a vengeance.

Inflation, as measured by the consumer price index (CPI), is running at a 40-year high. This is raising the cost of living, resulting in large increases in utility bills and food prices. Our incomes are being stretched more than ever in a generation as a result.

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Remember, all investments and any income they produce can fall as well as rise in value, so you could get back less than you invest.

The spike in inflation and why it matters to investors

While some will remember the era of double-digit inflation, over the years we've got used to low inflation.

Inflation has gradually been increasing since the start of the pandemic, and supply-side challenges have put pressure on the economic recovery.

This has created lingering effects, including worker shortages which are set to push inflation higher.

In recent months, other economic and geopolitical events, like the Ukraine crisis, have contributed too, meaning we’re likely to see things like food and energy prices keep rising.

The war has exacerbated the imbalance between supply and demand, and sparked fear about the distribution of energy, food and production capabilities. Western sanctions, which aim to cut Russia from the global financial system, are likely to push energy prices higher due to their significance as an energy exporter.

Inflation isn’t as transitory as some expected. But how long will it remain high? There’s plenty of uncertainty behind this question, so investors are looking for ways to combat rising prices.

One of the basic aims of investing is to at least protect the value of your money against inflation. Holding easily accessible cash for emergencies is sensible, but holding too much won’t help us outpace inflation when interest rates remain low.

Generating a ‘real return’ means growing your money faster than inflation. However, higher returns don’t come without risks and unlike the security offered by cash, investments can fall in value, so you could get back less than you invest.

Shares have, over the long term, outpaced inflation. They offer the potential for larger returns, but come with more risk. Bonds can add some balance to a portfolio. They might help smooth out some of the ups and downs, compared to only investing in shares. But are there other alternatives to help against inflation? Real assets could be a potential solution.

Real assets – the answer to inflation?

Real assets might be one answer to combating inflation. These assets are structures or raw materials that facilitate growth in the economy. For that reason, they can be more sensitive to changes in inflation.

Growth and income generated from real assets have also tended to be more closely linked to inflation. This means they can offer diversification and the potential to perform differently to other investments, including bonds and shares.

They still rise and fall in value though, and come with different risks. Some can be less liquid – harder to buy or sell – than more traditional asset classes.

Real assets can range from commodities and natural resources, to investments in property and infrastructure.

Commodities cover areas including energy, precious metals and agriculture. Prices respond to wider economic events like supply constraints, political tensions and changes in global demand. These events often drive prices higher, which we’ve seen more recently by the record-breaking changes in things like oil and wheat.

Natural resources include metal and mining businesses, renewable energies, or agribusinesses. Some raw materials rise in value with broader inflationary pressures, which can help increase cash flows and widen profit margins for companies producing materials.

Property is another example. Some commercial properties can increase rent in line with inflation, and property values can usually reflect the increased price of things like land, raw materials and labour costs.

Listed infrastructure is another prominent real asset. Infrastructure projects are crucial services to the economy and have either direct or indirect links to inflation.

Energy providers, for example, can factor in inflation and pass the increase onto consumers. Some projects are also backed by the government. They can have contractual agreements in place, allowing them to increase costs based on fixed amounts above inflation.

Real assets can offer real diversification to a broader long-term investment portfolio. They’re not without risk though. Inflation can also be unpredictable, and their link to inflation can vary.

That’s why we think a well-diversified portfolio – including a mix of different investments like shares and bonds, and a range of geographies and investment styles – is a sensible long-term strategy.

3 fund ideas to help beat inflation

One way investors can access a range of investments is through funds.

Lots of funds have performance objectives based on the returns of a specific type of investment – for example, a UK share-focused fund might aim to do better than the FTSE All-Share index of UK companies.

Other funds focus on areas like global shares, global bonds, or particular regions like emerging markets. There are also some passive funds that let you invest in inflation-linked investments.

While a range of investments can outpace inflation over time, certain funds specifically aim to beat inflation over the long term. Like some total return funds.

Total return funds typically invest in a mix of investments including shares, bonds, commodities and currencies. They’re more conservative than funds investing fully in shares. This means they’re unlikely to keep up with stock markets when they rise quickly, but they’re more likely to offer some shelter when share markets fall.

Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

Troy Trojan

The fund features on our Wealth Shortlist. Its objective is to grow an investment ahead of inflation, as measured by the UK retail prices index, over the longer term (five to seven years). Manager Sebastian Lyon likes to keep things simple. A key aim of his process is to shelter investors' wealth during the tough times, but also aim to grow it steadily. To do this, the fund’s constructed around four 'pillars'.

The first contains large, established companies Lyon thinks can grow sustainably over the long run, and get through tough economic conditions. He’s tended to focus on companies based in developed markets, like the UK and US. Although the fund hasn’t had much exposure in several years, the manager has the freedom to invest in higher-risk smaller companies.

The rest of the fund is made up of investments that could bring some stability to the portfolio during more difficult markets. The second pillar is made from bonds, including index-linked bonds.

The third pillar consists of gold-related investments, including physical gold. Gold is often seen as a safe haven during times of uncertainty, and can potentially perform well if inflation takes off or key global currencies weaken.

The final pillar is cash, which offers important shelter when stock markets stumble.

While the fund contains a diverse range of investments, it’s concentrated. This means each investment can contribute significantly to overall returns, but it can increase risk.

Find out more about Troy Trojan, including charges

Troy Trojan Key Investor Information

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2022. *The X unit class of this fund is featured on our Wealth Shortlist. However, we've used the O unit class here as it was launched earlier, and has a longer track record of performance data.

EdenTree Responsible and Sustainable Managed Income Fund

This fund also features on our Wealth Shortlist. Manager Chris Hiorns aims to pay a higher income than many other funds. He mainly invests in shares which offer the potential to generate an income and growth over the long term.

Companies that generate sustainable cash flows can have the ability to continue to pay dividends, despite an inflationary or difficult backdrop. Just over two thirds of the fund is currently invested in company shares. It currently yields 4.48% (as of 31 March), though yields and income aren’t guaranteed and change over time.

The rest of the fund is invested in infrastructure, REITs (real estate investment trusts), bonds and cash.

Some investments in bonds and cash provide diversification and could reduce part of the volatility that normally comes with only investing in shares. Investments in infrastructure and REITs could help offer some shelter against increasing inflation, though there’s no guarantee.

We think the fund could work well in a portfolio focused on trying to achieve an income, alongside some capital growth. It could also provide some balance alongside more share-focussed funds in a more adventurous income-focused portfolio. The fund invests mainly in developed countries, but also takes some emerging markets risk.

The fund’s charges can be taken from capital. This increases the yield, but reduces the potential for capital growth.

Find out more about EdenTree Responsible and Sustainable Managed Income Fund, including charges

EdenTree Responsible and Sustainable Managed Income Fund Key Investor Information

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2022.

First Sentier Global Listed Infrastructure

The First Sentier Global Listed Infrastructure fund aims to deliver income and long-term capital growth by investing in companies from around the world that run or own infrastructure assets, including those in emerging markets, which adds risk.

The fund isn’t currently on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential. However, we think it could be an option for investing in listed infrastructure, though there are other funds out there that offer exposure too.

Infrastructure is a specialist area. We think it should only form a small part of a well-diversified investment portfolio.

The managers invest mainly in large companies including utilities, transport, energy and communications providers.

Energy and utility prices have risen quickly this year. Utility providers, including water, gas and electric, are often able to pass on increasing costs to consumers, meaning some providers have held up well against rising inflation. Though, some other utility providers across parts of Asia and Europe have struggled due to rising input costs.

REITs are also held in this fund. They invest in income producing properties, including cell towers, hotels, medical sites and warehouses. These can be an effective hedge against inflation because, for example, certain properties and landlords can increase rents in line with inflation. Other sectors, including healthcare, have longer-term property leases which can have rent escalators to help provide more resilience in tougher economic times.

While the fund contains a range of investments within the infrastructure sector, it’s concentrated. So, each investment can contribute significantly to overall returns, but it can also increase risk.

Find out more about First Sentier Global Listed Infrastructure, including charges

First Sentier Global Listed Infrastructure Key Investor Information

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2022.