Investors seeking to protect their portfolios against rising inflation could look to funds such as Neil Woodford’s UK equity income offering, infrastructure portfolios and those focused on floating rate notes, according to Architas investment director Adrian Lowcock. 
Figures published by the Office for National Statistics yesterday showed that the consumer prices index rose to 2.3 per cent in February – up from a reading of 1.9 per cent in the previous month. Many commentators expect inflation to continuing climbing well above the Bank of England’s official 2 per cent target in the months ahead.
However, Lowcock (pictured) said: “Whilst inflation has returned, we believe it will peak at a lower level before easing off. Much of the inflation in the UK is driven by temporary external factors, in particular the weak pound and recovering oil price.
“At the same time the Bank of England has stated it is happy to let inflation over shoot its 2 per cent target without considering raising interest rates. The current levels of inflation have largely been priced into the markets and inflation proofing assets.”
But for those investors wanting to add extra inflation-proofing to their portfolios, the investment director highlights three funds – which we take a look at below.
UK equity income – CF Woodford Equity Income
Lowcock argues that stocks are well place to cope with mild inflation, as many companies can pass on moderate inflation by raising prices, cutting costs or through other methods such as changing the size of the goods provided.
Performance of fund vs sector and index since launch
Source: FE Analytics
One equity fund he tips is the £10bn CF Woodford Equity Income fund, which is headed by FE Alpha Manager Neil Woodford. As the chart above shows, it has outperformed its average peer and the market since launch with a 34.80 per cent total return – the highest in the sector.
“Woodford’s focus on two core sectors; healthcare and tobacco make it well placed to protect investors from rising inflation. Both sectors are very defensive in nature and demand for their goods and services is not particularly sensitive to changes in prices,” Lowcock said.
“He targets companies he believes are undervalued by the market with good visibility of earnings and the ability to generate a high cash flow. Woodford takes a cautious view on the UK and global economy and the fund has a defensive tilt to it which should help protect investors in the event of a recession.”
Some 36.52 per cent of the portfolio is currently in healthcare stocks, including the likes of AstraZeneca, GlaxoSmithKline and AbbVie, compared with less than 10 per cent in the benchmark.
Tobacco is a longstanding favourite sector of the investor, with Imperial Brands and British American Tobacco appearing in the top 10 holdings of the fund.
CF Woodford Equity Income has a clean ongoing charges figure of 0.75 per cent and yields 3.16 per cent.
Infrastructure – John Laing Infrastructure
Lowcock highlights infrastructure as a potential investment opportunity, as the revenues of many projects are linked to inflation. While the asset class has seen increased demand from investors in recent years, it has not risen as much as other inflation-proofing strategies such as index-linked bonds.
One fund he likes in this area is the £1.2bn John Laing Infrastructure investment trust, which is co-managed by Andrew Charlesworth and David Marshall. Since launch in November 2010, the trust has outperformed its average IT Infrastructure peer with a 79.74 per cent total return.
Performance of trust vs sector since launch
Source: FE Analytics
“This is an infrastructure fund investing directly in the equity of a diverse range of PFI projects. They invest in the concession of the infrastructure projects rather than obtaining full ownership i.e. the asset returns to the government at the end of the concession period,” Lowcock said.
“This is a defensive fund and has a diversified portfolio which pays a predictable, inflation-protected yield. Investors should expect steady, low-risk income with some small potential for capital growth.”
The portfolio is built around more than 60 infrastructure projects, mainly in the UK but a handful are in the US and Europe. Holdings are split across sub-sectors such as health, education, transport, government buildings and social housing.
Lowcock adds that another benefit of infrastructure is should inflation prove to be lower than expected, the investments should still provide a stable and predictable income with low volatility – which will continue to be attractive in the low interest rate world.
John Laing Infrastructure has ongoing charges of 1.30 per cent, yields 5 per cent and is trading on a 13.7 per cent.
Bonds – Neuberger Berman Senior Global Floating Rate Income
Bond yields have already risen in anticipation of rising inflation so Lowcock says some investors need to look further afield. Yields on floating rate notes are linked to Libor (or similar rates), so they rise in line with rising inflation expectations and interest rates.
In addition, floating rate notes are short dated as the interest paid is updated every three to six months. This means their capital values are less sensitive to rising bond yields.
Lowcock says Neuberger Berman Senior Global Floating Rate Income, which is run by Joseph Lynch, Martin Rotheram and Stephen Casey, could be a good option for investors seeking exposure to this area of the market. The five FE Crown-rated fund has posted a 32.65 per cent total return since its launch in April 2013.
Performance of fund vs sector since launch
Source: FE Analytics
“The investment process relies on a combination of bottom-up fundamental bond analysis but includes some global economic analysis,” the investment director said.
“Individual analysts submit ideas to the team which are then reviewed and approved by the investment committee of the fund. Neuberger Berman has a disciplined approach to investing and a large research team to be able to identify opportunities.”
The portfolio’s biggest sector exposures are to business services & equipment, healthcare and cable television, with its largest holdings including the likes of Valeant Pharmaceuticals, First Data, Virgin Media, Community Health Systems and Reynolds Group.
Neuberger Berman Senior Global Floating Rate Income has ongoing charges of 1.43 per cent.