Stephen Peters, investment trust analyst at Charles Stanley, says investment trusts have a unique advantage over funds in that they can leverage – or borrow money – to take advantage of growth in rising markets.
But he says it is important that investors don’t just look at a high yield when it comes to hedging against inflation.
“Equities in general are probably as good an inflation hedge as you can find. Equities and commodities,” he said.
Peters tips three investment trusts that offer inflation-protection – BlackRock World Mining, Invesco Perpetual Income & Growth and HICL Infrastructure.
BlackRock World Mining
Playing the commodities theme, Peters recommends the BlackRock World Mining IT, run by FE Alpha Manager Evy Hambro.
The analyst admits the trust has been a “pretty poor performer” in recent years, but says it does offer the potential to benefit from rising inflationary pressures.
Over the long term, the trust has beaten the HSBC Global Mining index, returning 390.58 per cent over 10 years.
Performance of trust vs index over 10 yrs
Source: FE Analytics
It has continued to outpace the mining index over three and five years, and performed broadly in line with it over one; however, as mining stocks have been out-of-favour, both the trust and index lost money over each period.
Hambro (pictured) took over management of the trust in May 2009. Since then it has gained 45.28 per cent, while the index made just 26.71 per cent, according to FE Analytics.
The trust is trading on a discount of 10.1 per cent with 13 per cent gearing. It has a yield of 4.1 per cent. Blackrock World Mining has ongoing charges of 1.42 per cent, according to the AIC.
Holdings in the trust are similar to those of Hambro’s $11.2bn Blackrock Global Funds World Mining fund, with Rio Tinto and BHP Billiton featuring as its top two holdings.
The majority of the fund is allocated to industrials, at 80 per cent, while 20 per cent of the fund is invested in precious metals and stones.
Many mining companies have global operations, making them difficult to classify by region; however, the highest regional weightings in the trust are to the Americas and the Middle East/Africa.
Perpetual Income & Growth
Peters also likes the four-crown rated Perpetual Income & Growth IT, saying it has a reasonable yield, but more importantly, the ability to grow that yield over time.
“You need to buy a trust that will grow its dividend faster than inflation over time,” he said. Peters adds that the trust is headed up by FE Alpha Manager Mark Barnett (pictured), who runs the four FE Crown Invesco Perpetual Select UK Equity fund.
The closed-ended investment company has consistently outperformed the FTSE All Share over one, three, five and 10 years. Over the last decade it made 304.11 per cent, nearly doubling the returns of the index, which made 163.46 per cent.
Performance of trust vs index over 10 yrs
Source: FE Analytics
Barnett is backing blue-chip UK names like BT Group, Astrazeneca and British American Tobacco in his top-10 holdings. He also has significant positions in Swiss pharmaceutical giants Roche and Novartis, though the majority of the portfolio is invested in UK equities.
The trust is trading on a narrow discount of just 0.1 per cent with 15 per cent gearing.
It has a dividend yield of 3 per cent and ongoing charges of 1.15 per cent, including the performance fee.
HICL Infrastructure
Peters says the HICL Infrastructure IT is a particularly good hedge against inflation because its underlying assets are inflation-linked, meaning the value of that asset may go up in line with inflation.
He adds that investors may want to consider a property trust.
“One could argue in a very inflationary world, you want to own physical assets rather than promises,” he said.
The five FE Crown HICL Infrastructure IT has the highest yield of any trust on this list, at 5.3 per cent.
It is trading on a premium of 13 per cent and is not geared.
HICL Infrastructure has no specified benchmark, but it has outperformed the IT Infrastructure sector over one and three years. It lagged its peers over five years.
Since launch in March 2006, the trust has made 81.77 per cent while the sector gained just 7.29 per cent, according to FE Analytics.
Performance of trust vs sector since launch
Source: FE Analytics
It has had impressively consistent performance compared to the sector, continuing to deliver positive returns, even in the market collapse of 2008. However, it lagged the sector as it rebounded in 2009, though it outperformed in the rising markets of 2012 and so far in 2013.
The Guernsey-domiciled trust has a mix of properties from schools in Edinburgh, Perth and Kinross as well as Home Office headquarters in London and Queen Alexandra Hospital in Portsmouth.
It has ongoing charges of 1.33 per cent.