Ruffer Investment Company, Capital Gearing Trust and Downing Renewables & Infrastructure are three of the trusts that can help protect investors if it turns out higher inflation is here to stay.
UK inflation measured by the consumer prices index (CPI) rose to 2.1 per cent in May from 1.5 per cent in April, exceeding market expectations and the Bank of England’s long-term target rate of 2 per cent.
Inflation can eat away at investors' returns, with cash, bonds and growth stocks on high valuations particularly susceptible. Investors may wish to think about diversifying away from the assets that have served them well over the past decade if the recent spike in inflation becomes a longer-term issue.
Below are five inflation-proofing trusts investors can consider in this environment.
Residential Secure Income REIT
The first pick comes from Chris Clothier, one of the three co-managers of the Capital Gearing Trust, who has opted for the £154.3m Residential Secure Income REIT.
The aim of the trust is to deliver inflation-linked returns by investing in affordable shared ownership, retirement and local authority housing throughout the UK.
Clothier said: “The trust is able to secure grant funding from the government, which in turn it uses to ensure that the rental element charged to tenants is affordable and also rises in line with RPI.
“Taken together, it benefits from a high-quality income stream, enabling the trust to pay a 4.8 per cent dividend which should rise in line with inflation.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Over five years, Residential Secure Income REIT has made a total return of 22.02 per cent, while the average trust in the IT Property – UK Residential sector has made 20.70 per cent.
It has ongoing charges of 1.59 per cent and is trading at a 3.2 per cent premium to net asset value (NAV).
Secure Income REIT
Clothier chose another REIT for his second pick, the £1.4bn Secure Income REIT, managed by Nick Leslau, Sandy Gumm and Mike Brown.
The trust invests in long-term secure income streams from real estate investments, and comprises a portfolio of high-quality assets and long leases of “marquee” assets.
This includes leisure assets, including, Alton Towers, Warwick Castle and Thorpe Park; private hospitals let to Ramsay Healthcare; and budget hotels let to Travelodge.
“While other similar trusts trade on significant premia to their underlying asset value, Secure Income REIT trades roughly at its net asset value,” said Clothier.
“Of particular comfort is the fact that a majority of its long leases are linked to RPI without any caps - which could prove very valuable in the event of a serious surge in inflation.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Sitting in the IT Unclassified sector, Secure Income has made 64.38 per cent over five years, recovering strongly from the March 2020 sell-off.
The REIT has ongoing costs of 2.39 per cent. It has a yield of 3.27 per cent.
Capital Gearing Trust
The next pick, coincidentally, is the Capital Gearing Trust, managed by Clothier, Peter Spiller and Alastair Laing.
This choice comes from Dzmitry Lipski, head of funds research at interactive investor.
Lipski said: “Whatever your view on markets, a well-diversified portfolio should help investors successfully navigate political uncertainty and market volatility, and give the best possible chance of generating a positive outcome whatever the market throws at us.
“Investors might consider multi-asset funds such as Capital Gearing Trust, which has a big emphasis on US Treasury Inflation-Protected Securities (TIPS), accounting for around 30 per cent of assets.
“Such bonds offer protection when stock markets fall, as well as providing a shield against inflation. While inflation is at low levels, the managers believe it will elevate in the years to come, in part due to the huge government borrowing that has taken place in response to the Covid-19 pandemic.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Over five years, the £745m trust has made 47.32 per cent, compared with 43.60 per cent for the average trust in the IT Flexible Investment sector.
It has ongoing charges of 0.58 per cent, a yield of 0.9 per cent and is trading at a 2.4 per cent premium to NAV.
Ruffer Investment Company
Rob Morgan, pension and investment analyst at Charles Stanley Direct, went for the £584.5m Ruffer Investment Company as his inflation-proofing pick.
The trust, managed by Hamish Baillie and Duncan MacInnes, combines conventional asset classes – global equities, bonds, currencies and gold – with the use of derivative strategies that serve as protection against a variety of economic scenarios.
Morgan said: “Given where bonds trade today, it’s harder to make a case for them offering familiar defensive qualities in future ‘risk off’ environments.
“The trust could be worth considering as a more stable, defensive core holding in a portfolio, especially for those concerned about inflation, and it could blend well with investors’ more growth-biased equity allocations.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Over the same period, Ruffer Investment Company has made 47.27 per cent, compared with 43.60 per from its IT Flexible Investment sector.
It has ongoing charges of 1.08 per cent, a dividend yield of 0.7 per cent and is trading at an 11 per cent discount to NAV.
Downing Renewable & Infrastructure VCT
The final pick is from Ben Yearsley, co-founder and director at Fairview Investing.
He said: “I’m going to suggest a new kid on the block, Downing Renewables & Infrastructure Trust.”
Launched in December 2020, the trust raised approximately £120m at IPO.
“It’s a renewable energy trust and what makes this trust different to many similar ones is that it isn’t just focusing on one power source and isn’t just investing in the UK,” Yearsley added.
He said existing UK solar assets benefit from a high degree of explicit inflation hedging through either FIT (feed-in-tariff) or ROC (renewables obligation certificates) payments.
“As Downing isn’t developing new solar fields, this gives its income stream good inflationary protection.
“It obviously doesn’t do much for capital values; however, if income has gone up, capital values should follow over time. Don’t forget though that long-term power prices are also important in determining value.”
Performance of trust vs sector over 5yrs
Source: FE Analytics
Over five years, the VCT has made a loss of 1.19 per cent, while the average fund in the IT Renewable Energy & Infrastructure sector has returned 0.76 per cent.
It is currently trading at a 1.4 per cent premium to NAV and the first dividend is expected in September.