Five ways to inflation-proof your portfolio

Savers were dealt a fresh blow recently following the unexpected news UK inflation had hit a 30 month high in April, rising from 4% to 4.5%.

Unsurprisingly, the latest hike has been met with further speculation about a rise in interest rates. But minutes from the Bank of England’s Monetary Policy Committee show rate-setters are split three ways on the issue.

While experts continue to battle it out, consumers are left in a state of flux and advisers are dealing with more calls than ever from worried clients.

Recent research from Selftrade found moe than a third of over-50s are extremely concerned about the effect of inflation, while 71% predict inflation will increase in the next six months.

Erode wealth

Elsewhere Defaqto data shows only 0.3% of the 1,869 savings accounts give a real rate of return to basic rate taxpayers, based on the Retail Prices Index.

So in these unprecedented times of high inflation and record low interest rates, what advice are you giving nervous clients?

The message from Malcolm Steel, director of Edinburgh-based Mearns & Company, is straightforward.

“Clients must reconsider their long held view that cash is a risk free asset.”

While he admits it is a good place to be for the short-term when other assets are volatile, he said cash is a poor long-term store of wealth.

If clients do hold cash, Martin Bamford, managing director of Informed Choice, urges them to do so in the most tax efficient manner, within an ISA for example.

The recently re-launched NS&I Index-Linked Savings Certificates are a good option in the current environment, according to Steel. He said a guaranteed return of RPI + 0.5% over five years will be attractive for many.

However, he said the major downside is the limited offer period and he expects it to oversubscribe quickly so recommends clients act quickly if they are interested.

Meanwhile, Jaskarn Pawar of Investor Profile is advising clients not to rush into buying the NS&I certificates.

He said: “They are fantastic investments for the right individuals. However the five year fixed term is an important factor. I would only invest an amount that a client is happy to tie up for that length of time.”

According to Bamford, the NS&I certificates are only part of the solution because the investment limit is £15,000.

Index-linked gilts

For higher net worth clients, he suggests anything that grows in an inflationary environment. At the moment he has less exposure to the fixed income sector with the exception of index-linked gilts.

His preferred fund in this asset class is Royal London Index-Linked Gilts fund, although he has some concerns these assets are starting to look overvalued.

“Investing in a fund like this can work in a well diversified portfolio, where a tactical allocation is being made to index-linked gilts, but it would not be a suitable like-for-like replacement for cash savings as the capital is at risk,” he said.

He also cites equities and commercial property as traditional inflation hedges.

Steel regularly recommends the AXA Distribution suite of funds. They have a very high allocation to index-linked gilts and this, coupled with their blue chip equity exposure, has met his target of beating the bank rate and inflation admirably over the years, he said.

More recently Mearns & Company added Sebastian Lyon’s Troy Trojan fund to its panel.

“We feel Sebastian and his team are safe custodians of our clients’ money and inflation risk dominates their thinking as much as it does our own.

“His fund has a significant allocation to index-linked gilts, gold and global equities to help mitigate this risk and the performance each year since launch in 2001 has been nothing short of exceptional, particularly noteworthy in bear markets,” he said.

Legal & General’s All Stocks Index Linked Index Tracker is another tool in Steel’s armoury.

With a total expense ratio of only 0.25%, it allows clients on the firm’s wrap account a pure exposure to the asset class at very low expense.