Mark Carney, the new governor of the Bank of England, recently assured markets that interest rates would stay at their ultra-low levels until unemployment falls to below 7 per cent – a level unlikely to be hit until 2016.
However, Carney highlighted three "knockout" signals that could stop the new forward-guidance system in its tracks – two of which revolve around higher future inflation.
If businesses and individuals believe that interest rates will stay low for such a long time, they are likely to borrow and spend more – which, while boosting economic growth, would inevitably create an environment of higher inflation.
With that in mind – and with UK inflation consistently exceeding its target – FE Trustnet highlights five portfolios that are purposely positioned for such a scenario.
Capital Gearing Trust
Peter Spiller is one of the most experienced and successful fund managers in the business, having run his Capital Gearing Trust since January 1982.
He recently told FE Trustnet that although he felt the end was in sight for a stronger UK economy, he says that the only way that can happen is if inflation picks up significantly from here.
This view is reflected in the manager’s 40.7 per cent position in index-linked government bonds. He holds securities issued by the likes of the US, UK, Sweden, Japan, Germany and Canada within his investment trust.
FE data for the trust only goes back to January 1999. Since then, the fund has returned 357.13 per cent, compared with the FTSE All Share’s 108 per cent and the LIBOR GBP 3m index’s 71.44 per cent.
Performance of fund vs indices since Jan 1999
Source: FE Analytics
The trust has also been significantly less volatile than the equity index over the period, weathering periods of market sell-offs far more effectively.
Such performance means the trust is currently trading on a 16.7 per cent premium to its NAV. Nevertheless, it has looked expensive for quite some time, trading above a 10 per cent premium over a cumulative period over one and three years.
Capital Gearing Trust has a total expense ratio (TER) of 1.4 per cent.
CF Ruffer Total Return
The management team of the £2.8bn CF Ruffer Total Return fund believes inflation will define the investment environment in the coming years.
It believes that the only way governments will be able to do away with their debt will be through inflation, via huge stimulus programmes. In a recent FE Trustnet interview, it played down fears that QE will soon be coming to an end on the back of Ben Bernanke’s comments in June and July.
The portfolio, which is headed up by the FE Alpha Manager duo of David Ballance and Steve Russell (pictured), currently has 33 per cent in index linked bonds, and significant exposure to gold bullion and gold equities – both typically regarded as an inflation hedge. CF Ruffer Total Return was launched in September 2000 and has been a standout performer in the IMA Mixed Investment 20%-60% sector over this time.
Our data shows it is the best-performing fund in the sector over 10 years, with returns of 147.05 per cent, and is also the best performer over five years, with returns of 69.17 per cent.
It has also considerably outperformed its composite benchmark – split 50/50 between the FTSE British Government All Stock and the FTSE All Share indices – over both of those periods.
CF Ruffer Total Return has an ongoing charges figure of 1.23 per cent and requires a minimum investment of £1,000.
Trojan
Star manager Sebastian Lyon, who runs the £2.5bn Trojan fund, believes that inflation is a long-term threat to investors – as he pointed out in his most recent note to shareholders.
"Our holdings in ‘linkers’ will ultimately protect us from rising inflation, which we believe to be the longer term threat. The ability to print is infinite," Lyon said.
The manager went into greater detail on this point in an interview with FE Trustnet earlier this summer.
US inflation-linked government bonds make up 13 per cent of his portfolio. Another 15 per cent of the fund is in UK index-linked sovereign debt.
Trojan was launched in May 2001. Since then it is the second-best performer in the IMA Flexible Investment sector, with returns of 161.08 per cent. Its FTSE All Share benchmark has returned 85.56 per cent over this time.
Performance of fund vs sector and index since May 2001
Source: FE Analytics
However, that performance has waned recently, with Lyon maintaining a defensive portfolio. Because of that, Trojan is a bottom-quartile performer and has failed to beat the index over one and three years.
Although Trojan was recently soft-closed, new investors can gain access to the fund via a number of platforms.
Psigma Income
Troue also highlights Psigma Income, which is run by FE Alpha Manager Bill Mott. He says that although the fund is constrained to equities alone, the manager believes inflation will be the likely outcome.
"Mott is trying to build a portfolio that will hold up in an inflationary environment. He has recently added some oil companies and mining companies which should offer him greater protection if inflation kicks in."
The £365m Psigma Income fund was launched in April 2007, since which time Mott has struggled to reproduce the high returns he achieved at Premier.
The fund has underperformed the IMA UK Equity Income sector and FTSE All Share over one, three and five years.
Performance of fund vs sector and index over 5yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| IMA UK Equity Income | 23.29 | 44.57 | 52.96 |
| FTSE All Share | 18.72 | 39.55 | 49.06 |
| Psigma - Income | 15.11 | 38.91 | 41.15 |
Source: FE Analytics
Nevertheless, the fund still throws off an above-inflation yield of 3.88 per cent. Mott focuses on the top end of the FTSE 100, with mega-cap dividend payers such as GlaxoSmithKline, Vodafone and British American Tobacco all residing in his top-10.
Psigma Income has an OCF of 1.68 per cent and requires a minimum investment of £1,000.
Evenlode Income
Hugh Yarrow, manager of the £32.2m Evenlode Income fund, thinks that inflation is inevitable in the long-run but says investors should also entertain concerns over possible deflation in the current market.
He recently told FE Trustnet that by concentrating on companies with popular and necessary brands, he is able to protect his investors' capital from both a deflationary and an inflationary environment.
"Companies that deliver a high return on equity, without using a lot of debt – and that focus on strong, intangible assets and brands – tend to do well in both," he said.
"Crucially, they have good pricing power. They can sell things even if their prices go up – think PG Tips and Colgate, for example," he added.
Yarrow’s five crown-rated Evenlode Income fund was launched in October 2009. Our data shows that it is a top-quartile performer in the IMA UK Equity Income sector over three years, with returns of 58.47 per cent.
Evenlode Income is a focused portfolio of just 34 holdings. It yields 3.32 per cent.
The fund has an OCF of 1.83 per cent and requires a minimum investment of £1,000.