Inflation-busting strategies

A slowdown in global growth has increased the chances of developed world economies introducing stimulus measures such as quantitative easing, which could push UK inflation - already well above the Bank of England’s target - even higher.

"As a result of over-steering by Bernanke and his peers to avoid the deflationary death spiral, we may see increased use of special measures, principally more quantitative easing," says industry star manager Bill Mott. "This would monetise the national debt and must ultimately lead to inflation."

In such an environment, investors should consider different strategies to maintain the value of their money.


Gold

Gold investors will tell you that the precious metal always holds its value. Legend has it that an ounce of gold in the time of Henry VII would buy a suit of clothes, just as it would do today.

However, some analysts say that gold has risen exponentially for too long and is due a correction. The price of gold is not fundamentally linked to inflation and value can go down for other structural reasons.


Overseas index-linked bonds

David Coombs, head of multi-asset investments at Rathbones, says that index-linked bonds have traditionally been the best way to protect against inflation.

"Normally if you want to hedge inflation risk one would normally buy index-linked bonds," he said. "But they are expensive at the moment and won’t insulate you against the current level of inflation."

"You should only buy linkers if you think inflation will go up 7 to 8 per cent and, even then, if interest rates go up then you’d lose money."

"I’ve been looking at overseas linkers because inflation is likely to go up higher outside the UK, which will make the pound stronger and be bad news for UK index-linked bonds."


Infrastructure equity funds

"Infrastructure funds are a good bet for inflation because often companies – controversially in the instance of train operators – increase prices in line with inflation plus a certain amount, therefore revenues are hedged against inflation," added Coombs.

"The First State Global Listed Infrastructure fund is a good bet to make a play on this theme."


Learn from the past

The last time inflation in the UK got out of control was during the 1970s when it averaged 13 per cent a year and peaked at 25 per cent in 1975.

Coombs says that during the period, retail stocks did very well because the government gave tax incentives to stop the value of stock decreasing.

"I’m not saying that this kind of measure will happen if inflation goes high this time but it is worth being observant to policy changes and seeing if that presents any opportunities."


Utilities

Graham Spooner, investment adviser at The Share Centre, says that, while he isn’t recommending utility companies right now, they do offer a certain amount of protection.

"United Utilities and Scottish Southern have promised to deliver dividend growth above the rate of inflation. This is because their pricing structures are linked to rises in the CPI."

"If you live in the area that the company covers you also get the added bonus of getting a little of the money you have paid for your utilities back via your investment."


Property

Like gold, property is another traditional hedge against inflation but Coombs says that rising prices and interest rates do not do the real estate market any good in the short-term.

"If you can get AAA tenants and RPI plus leases then I’d love to know because I’d buy a fund that followed that strategy," he said. "But they are impossible to find for the average investor and I’m finding it difficult to find anything like that from an REIT."


Strategic Bond funds

"Most Strategic Bond funds are long-duration which is not helpful in a high-inflation environment unless you invest in one that uses hedge fund type strategies," added Coombs.

"Dickie Hodges’ might do alright. L&G Dynamic Bond is long-duration at the moment but he has a flexible enough mandate to adjust his portfolio."