FE Alpha Managers Steve Russell, Martin Gray and Iain Stewart have all positioned their portfolios cautiously and are unfazed by the huge amount of money central banks are pumping into economies. 

The CF Ruffer Total Return, CF Miton Special Situations and Newton Real Return funds have all resisted upping their risk exposure in light of QE3, all preferring to "stick to their knitting" and protect against the downside. 

While they are united in their cautious stance, they have different views of why quantitative easing has been implemented, and how it will impact the economy – particularly with regard to inflation. 

Russell (pictured right) is a sceptic, believing that governments are intentionally trying to inflate away their huge debt piles.

"Since the crisis, there’s just one question: 'can the debt be repaid?' In short, we think the answer is no – in some way or another, the debt was always going to be defaulted on," he said. 

"As soon as they started printing money and slashing interest rates, it was clear that a stealth default would occur by means of inflation, rather than an all-out default like we saw in the 1930s. Negative real interest rates reduce the real value of debt, so effectively we’re taking the easier way out." 

Russell believes inflation could hit the high single digits within the next decade, and as a result he has a significant portion of his CF Ruffer Total Return fund and Ruffer Investment Company in inflation-linked bonds, gold and Japanese equities, which he believes are likely to prosper in an inflationary environment. 

Inflation linkers make up 30 per cent of his Total Return portfolio, gold and gold equities make up 11 per cent, and Japanese equities make up 15 per cent.

Martin Gray, who heads up the CF Miton Special Situations fund, is of a different opinion to Russell. 

"By the sounds of it, we have very similar views to Ruffer, but whereas they think inflation will be high, we think it will be low," he said. 

James Sullivan (pictured left), who co-manages the Miton portfolio with Gray, explained: "While the Bank of England’s balance sheets have risen considerably, we’ve seen no increase in the economy ex the banking system." 

"Why? It’s very simple. The banking system is hoarding this cash in order to releverage. This is why inflation hasn’t increased as much as expected." 

"Until the banks get out of their recovery phase, we won’t see money filtering into the economy and we won’t see inflation rise." 

"It’s difficult to see how inflation will rise or unemployment will decrease if none of this money filters through." 

As a result of these views, Gray and Sullivan have next to nothing in inflation linkers. They believe there is still value in holding gilts and have not ruled out the possibility of increasing their exposure if yields increase a little further. 

CF Miton Special Situations has 38.5 per cent in cash, reflecting the managers' cautious positioning. 

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Iain Stewart (pictured right), manager of the £6.3bn Newton Real Return fund, takes a more balanced view, preferring to hedge his bets by refusing to make a high-conviction call on inflation. 

"To be honest, I can see it going either way," he said. "Both arguments are very reasonable, but since we’re essentially talking about an experiment, it’s a difficult one to call." 

"The potential now for unlimited quantitative easing in the US perhaps pushes me a little over to the inflationary side, but on the other hand, deleveraging is always associated with a deflationary environment." 

"Indeed, I can see inflation and deflation happening at the same time – it all depends on what sector you’re talking about." 

"Limiting the drawdowns is our number-one priority, so we’ve decided not to make a big call either way." 

Stewart explains that the portfolio has some “inflation beneficiaries” including gold, food retailers and utilities, as well as defensive assets that would do better in a deflationary or at least a disinflationary environment, such as gilts, Australian government bonds and Canadian government bonds. 

"We also hold cash, which you could argue is a hedge against both," he added. 

Newton Real Return currently has a 20.8 per cent weighting in cash, 14.5 per cent in government bonds and 10 per cent in gold and gold equities.

FE Trustnet will be exploring methods investors can use to protect their own portfolio against inflation and deflation in the coming weeks. In his latest weekly blog, head of FE Research Rob Gleeson advised investors how they can do the former.