As the economy begins to emerge from lockdown and the repercussions of the coronavirus pandemic start to unfold, only time will tell if the economic environment proves to be inflationary or disinflationary.
There has been ongoing debate over whether the unprecedented central bank quantitative easing and government stimulus have set investors on a path of inflation or if the shutdown and loss of economic activity will ultimately result in prolonged disinflation.
Yet it came as no surprise to investors when April’s inflation numbers turned out to be negative, following collapsing oil prices, wage cuts and an economic shutdown.
However, the uncertainty lies in what post-Covid-19 inflation will look like. Adrian Lowcock, head of personal investing at Willis Owen, asserted: “What matters now to many investors is whether the disinflationary pressures will last.”
He added: “Some, such as the oil price, are already recovering. The measures implemented by the UK government and Bank of England (along with other major economies) are also likely to have some inflationary effect if demand returns.”
Lowcock said it will be a tough balancing act for portfolios and that it is not clear which conflicting force will win out over the next few years.
Therefore the solution he proposes for investors is to prepare for both: “Have some exposure to investments which will do well if we get disinflation, and some which will work if inflation returns with a vengeance.”
Two funds for a disinflationary scenario
Merian UK Smaller Companies
His first pick is Daniel Nickols’ £1.1bn Merian UK Smaller Companies fund. Nickols is an experienced smaller companies investor and heads up Merian’s highly regarded UK small- and mid-cap equity team.
Performance of fund vs sector over 5yrs
Source: FE Analytics
“Smaller companies are full of businesses which are trying to grow and expand irrespective of the external economic environment,” said Lowcock.
“Manager Dan Nickols looks for companies which can either grow earnings faster than the market for a long time or have the potential to surprise the market.
“Both types have the potential to deliver in low or even negative inflation and combined with Nichols detailed company analysis, pragmatic approach to valuations and flexibility this fund should be able perform.”
Merian UK Smaller Companies has ongoing charges of 1.03 per cent and has delivered a total return of 47.34 per cent over the last five years, which puts it in the second quartile of the IA UK Smaller Companies sector.
T. Rowe Price US Large Cap Growth Equity
Lowcock’s second disinflationary choice is the $2bn T. Rowe Price US Large Cap Growth Equity fund, which is managed by Taymour Tamaddon. The fund is built around a concentrated portfolio of around 60 holdings, which as its name suggests are some of the biggest companies in the US market.
Performance of fund vs sector over 5yrs
Source: FE Analytics
“Tamaddon has carefully implemented this well-established process that draws on in-house research, taking advantage of the research analysts' top ideas,” the Willis Owen head of personal investing said.
“Tamaddon takes big positions in market leaders, such as Amazon, but will also include less well-known names that meet his exacting criteria. He has a bias to companies with double-digit earnings potential over three years but some defensive exposure is added to limit risk during market setbacks.”
T. Rowe Price US Large Cap Growth Equity has ongoing charges of 0.74 per cent and has made 149.44 per cent total return over the last five years, ranking it top quartile among IA North America funds.
Two funds for an inflationary scenario
BlackRock Gold & General
Turning Lowcock’s fund choices if inflation starts to take off, the first he highlighted is BlackRock Gold & General. This £1.4bn fund is managed by Evy Hambro, global head of thematic and sector investing at BlackRock and the head of the firm’s natural resources equity team, and Tom Holl.
Performance of fund vs index over 5yrs
Source: FE Analytics
“Gold has a reputation for protecting investors against inflation over the long term as the value of the precious metal has historically risen to keep pace with rising prices,” Lowcock said. “This fund obtains exposure to gold and other precious metals through listed mining companies.”
“Co-managers Evy Hambro and Tom Holl execute a disciplined investment approach that incorporates detailed commodity and company research. At the company level, valuation analysis is rigorous and aims to find companies with the best exposure to commodity prices within an acceptable level of risk.”
“This leads to an emphasis on larger producers with quality assets and an ability to grow their production in a cost-effective way.”
BlackRock Gold & General has ongoing charges of 1.18 percent and has made a total return of 143.8 per cent over the last five years.
LF Lindsell Train UK Equity
The second fund to consider for an inflationary environment is LF Lindsell Train UK Equity. This £5.8bn fund, which is run by Nick Train, is one of the most popular funds in the market thanks to its strong track record and tested quality-growth approach.
Performance of fund vs sector over 5yrs
Source: FE Analytics
“Although this fund has performed well in low inflationary environments, the focus on consumer staples and business with strong brands should offer some protection from inflation as they can more easily raise prices,” Lowcock said.
“Nick Train’s process is unique and has proved successful. He looks for differentiated companies that offer a high and sustainable return on investment focusing on brands rather than physical assets.”
“He has a buy and hold style and would prefer to hold forever, only selling out if he no longer considers a company to be sufficient quality.”
LF Lindsell Train UK Equity has ongoing charges of 0.65 per cent and has delivered a first-quartile total return of 49.57 per cent over the last five years.