Skip to the content

Square Mile: Our favourite funds for inflation protection

28 July 2014

Square Mile, a strategic partner of FE, highlights its top-rated funds for defending against the eroding effects of inflation.

By Alex Paget,

Senior Reporter, FE Trustnet

Inflation has remained stubbornly low in much of the developed world, despite an extended period of ultra-low interest rates and copious amounts of money printing on the part of the world’s central banks.

Many managers still see disinflation, or even deflation, as the major threat to financial markets due to the high levels of debt in the system.

However, there are signs that inflation could be picking up here in the UK, with the consumer price index (CPI) rising to 1.9 per cent last month. Also, while rampant inflation may seem unlikely in the near-term, industry experts will no doubt tell you that the key to a well-rounded portfolio is not only diversification, but protection against various possible headwinds.

The team at Square Mile, the investment research firm and FE’s strategic partner, clearly sees inflation as a potential future threat as it has listed inflation protection as one of its four “investment outcomes” alongside capital preservation, capital accumulation and income.

With this in mind, the team reveals three of its best-rated funds for investors who want to defend their capital against the sustained increase in the general price of goods and services.


M&G UK Inflation Linked Corporate Bond


One of Square Mile’s favourite funds for inflation protection is the £904m M&G UK Inflation Corporate Bond fund. It is headed up by Ben Lord and Jim Leaviss, who are in turn supported by M&G’s sizeable fixed income team.

“This is an interesting strategy which should provide investors with protection against UK inflation over the longer term, while offering something slightly different from standard government inflation-linked bond mandates,” the team at Square Mile said.

Lord and Leaviss invest directly in index-linked corporate bonds, but this is a small and relatively illiquid market, the managers also create their own inflation protection by combining government inflation linked bonds with derivative instruments.

According to FE Analytics, the M&G UK Inflation Linked Corporate Bond fund has achieved its objective since its launch in September 2010. It has returned 15.9 per cent over that time, while the UK CPI has risen by 11.9 per cent.

Performance of fund vs index since Sep 2010


ALT_TAG

Source: FE Analytics

Although Square Mile believes the fund will continue to meet its objective, it warns that there are a number of risks surrounding Lord and Leaviss’s strategy.

“The fund should provide investors with a good hedge against UK inflation over the longer-term, but may deviate substantially from its goal over the short-term, as technical and sentiment-driven factors are likely to affect the fund's price. This is particularly true as the fund takes on credit risk.”

M&G UK Inflation Linked Corporate Bond has an ongoing charges figure (OCF) of 0.61 per cent. Square Mile has awarded the fund its A rating.



First State Global Listed Infrastructure

Investors who want to take on a little more risk may wish to consider the £925m, five crown-rated First State Global Listed Infrastructure fund, which Square Mile has given an AA rating.

The fund, managed by Peter Meany and Andrew Greenup, sits in the IMA Global sector and only invests in businesses that are involved in global infrastructure, such as water, electricity, highways and railways, airport services, marine ports and services, and oil and gas storage and transportation.

The Square Mile team says the nature of these assets mean the fund has the ability to protect its investors against inflation.

“In practice, the fund managers seek to deliver a combination of inflation-protected income with growth of capital over an investment cycle through a globally diversified portfolio of high quality listed infrastructure securities that are primarily listed on developed markets,” Square Mile said.

The fund was launched in October 2007. Its returns of 61.68 per cent mean it is a top quartile performer over this time and has massively outperformed inflation.

Performance of fund vs sector and index since Oct 2007

ALT_TAG

Source: FE Analytics

First State Global Listed Infrastructure has also outperformed the sector and the UK CPI over rolling one-, three- and five-year periods.

Square Mile said: “This is an interesting fund for a number of reasons. It offers access to a different asset class and can meet the needs of a range of investors. Its objectives are clearly articulated and to date have been achieved.”

“It is managed by an experienced, focused and driven investment team, still in the early stages of building its franchise.”

First State Global Listed Infrastructure has a yield of 2.66 per cent and an OCF of 0.83 per cent.


Schroder MM Diversity

The £1.4bn Schroder MM Diversity fund of funds is a useful one-stop shop for investors looking for inflation protection, according to Square Mile. It has given the portfolio an AA rating due to managers Robin McDonald and Marcus Brookes'  proven ability to deliver strong, risk-adjusted, returns.

Brookes and McDonald aim to outperform inflation and therefore the fund is benchmarked against the UK CPI.

The fund has returned 36.76 per cent since the two managers took over in October 2007, beating both its benchmark and IMA Mixed Investment 20%-60% Shares sector in the process.


Performance of fund vs sector and index since Oct 2007

ALT_TAG

Source: FE Analytics

“The managers have established a sensible and considered approach that is conscious of investors' return needs, whilst being mindful of capital volatility. The managers have proven their ability to flexibly manage multi asset funds through different market cycles,” said Square Mile.

“In our view, they are capable asset allocators and experienced fund selectors with their knowledge of the universe supporting the investment process.”

Although it has outperformed over the longer-term, Schroder MM Diversity has lagged behind the sector more recently as the managers have focused more on capital preservation.

Brookes and McDonald currently hold 33 per cent in cash, which is a reflection of their view that there is very little value in global bond markets.

The managers are also concerned about certain areas of the equity market and, as Brookes told FE Trustnet earlier this year, they have been upping their exposure to more defensive managers.

Their top 10 holdings include Morgan Stanley Diversified Alpha Plus, Schroder UK Absolute Target, Majedie Tortoise and Alastair Mundy’s Investec UK Special Situations fund.

Schroder MM Diversity has an OCF of 1.15 per cent, which is considerably lower than most funds of funds.

It is also a member of the FE Select 100.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.