Aim for a balanced portfolio with inflation protection and exposure to long-term growth trends, investment managers say.
Since Russia’s invasion of Ukraine, many investors have gone back to the drawing board. They’re trying to assess what impact — negative or possibly even positive — this ‘black swan’ event will have on the global economy.
It’s certain that it’ll affect the cost of living as energy prices rise further and supply chains continue to be disrupted. Couple that with rising inflation and expected interest rate rises from central banks, including the Bank of England, and there are a lot of moving parts investors need to consider before deploying their money in the new tax year.
“Investing should be less about trying to predict the future, looking at risk premia and ensuring your portfolio is positioned on a range of probability-related outcomes,” says Ben Seager-Scott, head of multi asset funds at Tilney Smith & Williamson.
He goes on to say that he’s focused on long-term themes, such as inflation, and has positioned client portfolios accordingly.
In January, inflation reached 5.5% — a near 30-year high — and the Bank of England has started raising the bank rate. Ben expects inflation to peak but then stabilise around 2-3%. In this case, an exposure to alternatives, through absolute return vehicles, should serve as a buffer.
Ben’s prefers having a diversified basket, including the CIFC Long/Short Credit fund, Graham Macro Ucits and the Lyxor Sandler US Equity fund. He’s also happy to hold onto gold, through the Invesco Physical Gold ETC.
“The challenge with these things is you need to buy insurance before your house is on fire,” he says. “Gold is sensitive to real yields and having closed out our Tipps position, we’re retaining it while rates are relatively low and inflation looks uncertain, as a shock absorber to try and smooth parts of the portfolio.”
Meanwhile, as inflation puts pressure on both equities and bonds, the diversification benefits of bonds will be called into question, according to Rob Morgan, chief analyst at Charles Stanley.
While conventional bonds can still have their place in a portfolio, as it’s difficult to predict how long inflation will last, there may be a collapse.
“I’d be cautious about holding much in gilts and very safe bonds as they’ll be affected by the rate of inflation,” warns Rob. “You can have a bit of exposure to the more inflation-friendly end of the fixed-interest spectrum.”
Businesses that are capital light and digital might be better insulated from the impact of inflation, but it’ll all come down to how companies adapt, he adds.
Producers of natural resources, including energy and mining companies, where there’s a direct link between the price of the commodity and their profits, look set to be direct beneficiaries of the current environment.
In the UK, companies such as BP, Royal Dutch Shell, Rio Tinto and BHP make up a significant part of the FTSE 100 index, which could be accessed through a specialist fund.
Long term, investors should think about investing in companies that offer structural growth, Morgan pointed out, that can outrun inflation. These could be in healthcare or companies that are part of the
energy transition.
“In the short term, higher inflation and interest rates are weighing down on everything — companies that can harness key trends in the long run are a good place [to invest],” he adds.
The Worldwide Healthcare Trust offers exposure to general healthcare, while Schroders’ Global Energy Transition Fund invests across the whole green
