Funds that focus on global equity income, gold and property equities are some of the ways investors can attempt to protect their portfolios from inflation, according to Fidelity International’s Maike Currie. 
Figures from the Office for National Statistics show that the UK consumer prices index climbed to 2.9 per cent in August, higher than what many economists had been expecting.
Currie (pictured), Fidelity’s investment director for personal investing, pointed out that Bank of England governor Mark Carney is just “a whisker away” from having to write to chancellor Philip Hammond explaining why inflation is so far off its official target of 2 per cent.
“Many experts remain sanguine about the risk of persistently high inflation returning with a vengeance, believing that the rise in prices will ease off once the Brexit effect of a weaker pound falls out of the year-on-year calculation. While that may be the case, there’s no escaping the fact that our pay packets are not keeping up with rising prices,” she added.
Inflation vs interest rates vs wage growth
Source: Fidelity International/ONS/Bank of England. September 2017
“Investors and consumers will need to not only review their spending and savings habits while they wait for that elusive pay rise, but also revisit their portfolios as they wait for inflation to ease off.”
In the following article, we find out which four funds Currie thinks have the potential to protect portfolios from inflation.
Investec Global Gold
First up is this £96.4m fund, which is part of a wider commodity investment strategy at Investec. The firm’s commodities team conducts detailed research into the medium-term price trends behind gold, then chooses the best companies for the expected environment.
“Gold has long been seen as a useful hedge against the wealth-eroding effects of inflation,” Currie said.
“The Investec Global Gold fund provides an effective way to gain exposure to the yellow metal via a diversified portfolio of gold mining company shares. Co-managers George Cheveley and Hanré Rossouw can also invest in physical gold ETFs and companies which mine for other precious metals.”
Cheveley and Rossouw believe shares of gold miners can outperform bullion over the long term because companies can work on costs and margins, and boost their profits by more than just the metal’s performance. The portfolio is also built within stringent risk parameters.
The managers have only run the fund since April 2015. Over that time, it has made a 44.25 per cent total return compared with a 97.02 per cent rise in its Euromoney Global Gold benchmark; however, the fund’s 43.33 per cent annualised volatility has been significantly lower than the 65.73 per cent from the index.
Investec Global Gold has an ongoing charges figure (OCF) of 0.97 per cent.
Aviva Investors Multi-Strategy Target Return
Currie continued: “If you want to buy a slice of physical assets that could rise with inflation while still maintaining exposure to the stock and bond markets consider a multi-asset fund such as the Aviva Investors Multi-Strategy Target Return fund, which can blend equites and bonds with assets such as commercial property and commodities to cover most bases.”
The £5.1bn fund aims to return 5 per cent more than the Bank of England base rate annually, before fees, over a three-year period, with only half of the volatility of global equities. As the chart below shows, it has made 9.10 per cent since launch in July 2014, compared with an 8.66 per cent return from its average IA Targeted Absolute Return peer.
Performance of fund vs sector since launch
Source: FE Analytics
The fund is headed up by Peter Fitzgerald, Dan James, Ian Pizer and Brendan Walsh. The process behind it makes use of the full investment research resources of Aviva Investors: it draws ideas from traditional assets and more niche areas from the Strategic Investment Group, which is formed of key investment professionals from across the business.
Its portfolio includes three broad types of holdings: market ideas, where returns are driven by the business cycle; opportunistic ideas that exploit more one-off events; and, risk-reducing ideas that are either independent of market direction or are likely to perform best when markets are challenged.
Aviva Investors Multi-Strategy Target Return has a 0.85 per cent OCF.
Fidelity Global Dividend
Some investors may want to hold their inflation-proofing assets in equity income funds to work their money harder, Currie said. She highlighted the £894m Fidelity Global Dividend fund for this.
“The Fidelity Global Dividend fund is a solid option for someone looking for an equity income fund that benefits from a global approach. Manager Dan Roberts scours the globe for attractive income streams but never compromises on quality given his razor-sharp focus on preserving client capital,” she said.
Roberts’ process concentrates on long-term valuations and companies’ cash conversion over a three-year time horizon. The FE Invest team noted that this is a similar approach to other equity income funds but Roberts has been more successful as he seems to have more patience when implementing it.
As the following chart shows, the fund has made a 95.38 per cent total return over five years, making it the second highest returning IA Global Equity Income fund (its average peer has made just 71.42 per cent over the same time frame). It has also beaten the MSCI AC World index, albeit by a slimmer margin.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Fidelity Global Dividend has an OCF of 0.97 per cent and is yielding 2.85 per cent.
iShares Global Property Securities Equity Index
Currie’s final pick is the iShares Global Property Securities Equity Index fund, which is a £2bn unit trust that tracks the FTSE EPRA/NAREIT Developed index.
“Property is another asset class that offers good protection against the wealth-eroding effects of inflation,” the investment director said.
“The bulk of the fund’s holdings are in real estate investment trusts, exchange-traded property companies which themselves hold diversified portfolios. In addition, the fund invests in retail, industrial, office and residential property as well as hotels and real estate service companies.”
It is one of the IA Property sector’s strongest performers over three and five years (making 67.13 per cent against the peer group’s 45.08 per cent return over the latter time frame) although it has fallen into the bottom quartile on a one-year view.
The iShares Global Property Securities Equity Index has a 0.22 per cent OCF and is yielding 2.54 per cent.