CF Lindsell Train UK Equity, First State Global Listed Infrastructure and Evenlode Income are among the funds recommended by industry experts for investors anticipating a rise in inflation levels.
Rising inflation has been the hope of central bankers for several years as they have embarked on unprecedented monetary policies including ultra-low interest rates and quantitative easing measures.
In general, low interest rates mean more people are able to borrow more money and with, more cash to spend, consumers help the economy to grow and inflation to increase.
At least that is theory. In reality, however, the measures employed by central bankers for much of the decade since the financial crisis, inflation has remained stubbornly low across the world.
Indeed, latest figures from the US Department of Labor showed inflation – as measured by the Consumer Price Index for All Urban Consumers – rose by just 0.1 per cent to 1.7 per cent in July, while euro area annual inflation was lower at 1.3 per cent.
In the UK, Consumer Price Index (CPI) inflation was slightly higher with the annual rate at 2.7 per cent in July, though this was lower than many had anticipated given weaker sterling increasing import prices.
However, with monetary policies still extremely accommodative in many areas of the world there remains hope that inflation can pick up.
Having yesterday looked at the funds to hold if central banks begin to raise interest rates, below FE Trustnet looks at the funds to hold if central banks keep interest rates low and inflation begins to pick up.
Evenlode Income
One fund that should benefit is the five FE Crown-rated Evenlode Income fund, though it may surprise some by being on the list.
The £1.4bn fund is run by FE Alpha Manager Hugh Yarrow and Ben Peters and is currently in the IA UK All Companies sector, having left the IA UK Equity Income sector after narrowly missing out on the previous 110 per cent yield target of the FTSE All Share.
Sam Buckingham, research analyst at Thomas Miller Investment, said: “Despite being an income fund, which are often thought of as ‘bond proxies’ and would typically do poorly in this environment, the unique investment process implemented by Hugh results in a portfolio that should be relatively immune.”
The fund needs a company to possess two key qualitative characteristics to be included in the portfolio: they must have an ‘economic moat’, a hard to replicate business models based around competitive advantages; and, pricing power.
“The mixture of these requirements results in the team favouring businesses that have reliable earnings by selling low-ticket goods/services, where consumers buy the product based on its perceived value to them, as opposed to production costs,” Buckingham added.
“As a result, instead of having to take the hit for the inflated production costs, they are actually able to pass these onto their customers.”
An example of this type of stock is Unilever, he said, adding@ “Despite all the noise around the Marmite battle last year between themselves and Tesco, indicating a lack of ability to pass on the higher prices, what went relatively un-noticed was the fact that the majority of other supermarkets had to give into these price pressures.”
Performance of fund vs sectors since launch
Source: FE Analytics
Since its launch in October 2009, the fund has returned 171.17 per cent, significantly ahead of both the IA UK All Companies and IA UK Equity Income sectors.
Evenlode Income has a yield of 3.3 per cent and a clean, ongoing charges figure (OCF) of 0.95 per cent.
CF Lindsell Train UK Equity
Staying with equity strategies, Martin Bamford, managing director of Informed Choice, highlighted fellow five crown-rated CF Lindsell Train UK Equity as another fund set to benefit from rising inflation.
“Thinking specifically about investments, the retail sector is likely to experience lower profits when inflation rises, as they can’t always pass on higher import costs to their customers,” he explained.
“Equity investors who are fearful of rising inflation and interest rates should delegate stock selection and sector allocation to an active fund manager, who can position his or her portfolio accordingly.
“CF Lindsell Train UK Equity is a good pick here, as [FE Alpha Manager] Nick Train applies a consistent approach to selecting ‘exceptional’ companies with sustainable business models or established resonant brands.”
The fund has been a top quartile performer over one, three, five and 10 years, returning 236.11 per cent over the last decade, almost triple the returns of the All Companies sector and FTSE All Share benchmark.
Performance of fund vs sector and benchmark
Source: FE Analytics
The portfolio should remain almost unchanged as the manager applies a very strict investment approach meaning that once a company has been bought there should be very little reason to sell it.
Indeed, Train hardly ever sells stocks, with turnover only occurring if a company loses its long-term competitive advantage.
“Sometimes we are asked what it is we do all day – given we are not trading in and out of our holdings,” Train noted in its latest factsheet.
“One answer is that we are watching very closely the capital allocation decisions taken by the boards of the companies we hold – knowing that cumulatively and over time it is the calibre of those decisions that will determine the long-term success, or otherwise, of our own investment decisions, made with your capital.”
The fund has a yield of 1.92 per cent and an OCF of 0.72 per cent.
First State Global Listed Infrastructure
Another equities-based fund that should benefit from rising inflation is the five crown-rated First State Global Listed Infrastructure run by FE Alpha Managers Peter Meany and Andrew Greenup.
Sheridan Admans, investment research manager at The Share Centre, said: “Companies involved with infrastructure development are naturally seen as being defensive and mature, suggesting reasonable levels of dividends, and dividend growth with many having inflationary linked pricing built into their models/services.
“This is further aided by high barriers to entry, strong pricing power, sustainable growth and predictable cash flows making the asset class a relatively ‘safe haven’ in an uncertain financial world.
“Infrastructure investing is generally lower in volatility when compared to investing in other sectors in the equity markets and therefore exhibits defensive qualities.”
He added: “Companies considered to be infrastructure focused are also likely to be monopolies that are less dependent on the economic cycle, that provide some inflation protection through pricing power.
“They are normally disciplined in their capital management and a responsible approach to stakeholders/shareholders.”
First State Global Listed Infrastructure has been a top quartile performer over the last three and five years, beating its benchmark over these periods, as the below shows.
Performance of fund vs sector and benchmark
Source: FE Analytics
The £2.7bn fund invests in companies involved in infrastructure projects globally, with its largest weightings currently in electric utilities 25.5 per cent, highways and railtracks 18.3 per cent and oil & gas storage & transportation 14.3 per cent.
It has a yield of 2.63 per cent and an OCF of 0.82 per cent.
L&G All Stocks Index Linked Gilt Index Trust
The final fund that should benefit from rising inflation is the four crown-rated L&G All Stocks Index Linked Gilt Index Trust, which tracks the FTSE Actuaries British Government Index- Linked All Stocks Index.
Informed Choice’s Bamford said: “Rising inflation tends to toughest for savers in cash and for investors with fixed income holdings.
“With low interest rates on cash deposits, higher price inflation will quickly erode its buying power.”
“Gilts and investment grade corporate bonds are likely to suffer falling capital values when inflation rises and this results in higher interest rates,” he added.
“One exception is index-linked bonds, making funds like Legal & General All Stocks Index Linked Gilt Index Trust a sensible option.
“This fund invests in index linked gilts issued by the UK government and has very low ongoing charges of 0.15 per cent.”
The fund has a tracking error of 2.83 on an annual basis over the last 10 years, returning 126.43 per cent versus the benchmark’s 133.17 per cent.