Schroders High Yield Opportunities, Evenlode Income and City of London Investment Trust are among a selection of funds highlighted by Darius McDermott of Chelsea Financial Services for tackling the impact of high inflation.
Figures from the Office for National Statistics earlier this week showed that inflation moved higher than many City analysts were expecting in August and remains well above the Bank of England’s 2 per cent target.
The Consumer Prices Index rose by 2.9 per cent compared with 2.6 per cent during July, with the rise attributed to price rises in clothing & footwear, recreation & culture, and restaurants & hotels.
Rise in CPI over 5yrs
Source: Office for National Statistics
Noting the surprise spike in inflation, Adrian Lowcock, investment director at Architas, said: “The devaluation of the pound in 2016 continues to impact prices in the UK as the cost of imported goods rises.
“In August, inflation was driven by higher clothing and footwear costs as fewer items were discounted. With price rises across many consumer items discretionary spending is likely to be impacted.”
However, Lowcock said while the spike had been a shock it was unlikely to prompt the Bank of England’s Monetary Policy Committee into action.
He added: “The spike in inflation in August is driven by seasonal factors and is heavily influenced by what happened last year, shortly after the Brexit vote.”
While it remains to be seen whether the Bank of England will raise interest rates to tackle rising inflation, Chelsea Financial Services managing director Darius McDermott (pictured) said there are several ways in which investors can tackle rising inflation.
He said: “With inflation now almost 3 per cent and cash savings rates languishing near zero, the value of our money is being eroded at its fastest rate for some time.
“If inflation continues at this rate for the next three years, £1,000 in a cash savings account could be worth as little as £920. That's an 8 per cent fall in value of a ‘safe’ asset.”
Below, McDermott highlights three strategies for investors concerned about the impact of higher inflation on their savings.
Search for a higher yield
The first way to beat inflation, according to McDermott, is by searching for a higher yielding fund. He noted that because income paid by bonds is fixed at the time they are issued, high or rising inflation can pose a problem as it erodes the real return that investors receive. 
“To mitigate this risk there are two options: either invest in a fund such as AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity, or find a bond fund that pays a high enough yield to provide a cushion,” McDermott (pictured) said.
“Schroder High Yield Opportunities, which has a yield of 6.18 per cent, and TwentyFour Dynamic Bond, which invests across the fixed income market and currently has a 4.76 per cent yield, are worth a look.”
The £750.6m AXA Sterling Credit Short Duration Bond fund is managed by Nicolas Trindade and has a focus on capital preservation and income while reducing volatility.
As such, the fund has returned just 5.75 per cent over three years, compared with a 17.8 per cent gain for the average IA Sterling Corporate Bond fund.
Performance of AXA Sterling Credit Bond vs benchmark & Sector over 3yrs
Source: FE Analytics
The five FE Crown-rated Schroder High Yield Opportunities fund is managed by FE Alpha Manager Michael Scott. The income-focused fund invests at least 80 per cent of its assets in sub-investment grade (as defined by Standard & Poor’s) or unrated securities issued by governments, government agencies and companies. At least 50 per cent of its assets are held in pan-European bonds.
Over three years, the £498.8m fund has returned 23.91 per cent compared with a gain of 12.87 per cent for the average IA Sterling High Yield fund peer.
McDermott’s other recommendation for high income is the TwentyFour Dynamic Bond fund. Team-managed, the £1.6bn fund invests in a broad range of assets with aims to deliver an attractive level of income with the opportunity for capital growth.
Inflation-proof your investments
The second way that investors can combat rising inflation is by attempting to ‘inflation-proof’ their investments by investing in companies unlikely to be impacted by a high or rising inflation environment, said Mc Dermott.
“Some companies do better than others in inflationary environments,” he explained. “Cash generation and pricing power can provide a buffer for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers.
“Evenlode Income invests in companies with these characteristics. Infrastructure is another good option. Assets owned by infrastructure funds, such as toll roads, have pricing that is linked to inflation. Here, you could consider First State Global Listed Infrastructure.”
The five crown-rated £1.4bn Evenlode Income is managed by FE Alpha Manager Hugh Yarrow and Ben Peters. The UK equity income fund places an emphasis on sustainable real dividend growth with a focus on companies with high returns on capital and strong free cash-flow. Investing across the market-cap spectrum, the fund has a low turnover within the portfolio.
With a historic yield of 3.3 per cent, the fund has risen by 43.35 per cent over three years compared with a 26.3 per cent gain for the average IA UK Equity Income fund.
Performance of fund vs benchmark & sector
Source: FE Analytics
First State Global Listed Infrastructure is a favourite among investors and advisers. The £2.7bn five crown-rated is managed by FE Alpha Managers Peter Meany and Andrew Greenup.
The fund invests in shares of companies involved in infrastructure around the world, including utilities, highways & railways, airport services, marine ports and oil & gas storage and transportation. However, it does not invest directly in infrastructure assets.
The fund currently yields 2.7 per cent and has risen by 60.36 per cent compared with a 40.77 per cent rise for the average IA Global fund.
Go all out for UK equities
Lastly, investors can put their faith in UK equities, said McDermott. He highlighted the Fidelity Enhanced Income fund and City of London Investment Trust as examples of stock-picking funds that could benefit from increased volatility as UK begins to withdraw from the EU.
“Fidelity Enhanced Income has a yield of 6.35 per cent, while City of London Investment Trust has a yield of 3.91 per cent and a fantastic record of raising dividends over more than 50 years,” he explained.
“As we start to extricate ourselves from Europe, volatility is likely to rise – which could create opportunities for talented stock-pickers.”
The £550m Fidelity Enhanced Income fund has been managed by David Jehan and Michael Clark since 2009. The investment approach is based on the belief that companies consistently delivering dividend growth will outperform strongly over the long term.
The managers look for companies that can withstand tough economic times and generate high cash flows to fund future growth and to be paid out as increasing dividends over time. The style is summarised by the firm as ‘safety of income at a reasonable price’.
Over three years, the fund has returned just 14.42 per cent compared with a 24.87 per cent return for the IA UK Equity Income sector.
The City of London Investment Trust, meanwhile, is overseen by Job Curtis and aims to deliver long-term growth and income. The fund has delivered a 26.09 per cent return over three years compared with a 24.88 per cent gain for the average IT UK Equity Income trust.