The Top 5 Tips to Inflation-Proof Your Company Portfolio


Following last week’s consumer price index (CPI) announcement that comnsumer prices dropped in March by the largest amount in more than two years, Michelle McGrade, Chief Investment Officer at TD Direct Investing, comments and provides some top tips on how to protect from inflation hits like this.

As predicted, inflation will remain at 2.3% today, this remains the highest year on year level since September 2013. This is mainly due to the rise in pound and a fall in Oil. Another factor is airfares continuing not to rise and Easter falling later this year in April.

So, while energy prices fell, food prices rose. All in all consumers are feeling the pinch, according to Visa, consumer expenditure growth in Q1 was the weakest in three years.

Inflation is expected to peak around 3% by the year end. And, while the job market is tight, wages are not moving. This all means that consumer companies will have to fight harder to entice the customer in. Not only is competition intense but there is price pressure too. Let’s also not forget that retail sales have been flourishing for the last 6-7 years so some slowdown is expected.

The weak pound however should help exporters, and the industrial trade should take over, reducing the reliance on the consumer to hold up the economy.

Income funds – Companies with high barriers to entry and pricing power can offer some protection against inflation. Those paying dividends provide a further return, whether you choose to take the income or reinvest it. For global equities, take a look at Artemis Global Income. If you want to access just UK companies, Threadneedle UK Equity Income could fit the bill.

Index-linked Bonds – While inflation is the enemy of bond markets, index-linked bonds, as the name suggests, are linked to inflation in order to protect the value of investments. L&G All Stocks Index Linked Gilt Index provides exposure to the UK index-linked market, although this fund has performed strongly of late and may start to look expensive if interest rates rise.

Alternatives – Infrastructure assets such as toll roads typically have their prices linked to inflation. First State Global Listed Infrastructure is on our Recommended Funds list. Gold can be used as a hedge in uncertain markets and can offer an inflation insurance policy. Take a look at BlackRock Gold & General. Rising property prices, combined with rental yield, have also offered an effective hedge against inflation in the past. L&G UK Property Feeder offers exposure to the UK commercial property market. Commodities is another asset class which is worth considering. Inflation can be closely correlated to the price of oil and other commodities. First State Global Resources invests across a range of commodity holdings.

Exchange traded funds – Another way of gaining low-cost access to these asset classes is via exchange traded funds (ETFs). Here are some you may want to investigate further:

  • Global index-linked bonds – iShares Global Inflation Linked Government Bond
  • Gold – ETFS Physical Gold
  • Commodities – Lyxor Commodities TR/Core Commodity CRB

Areas to avoid – In an environment when interest rates are lower than inflation, cash does not provide any protection. As prices go up the purchasing power of your cash is being eroded – in effect your cash will buy you less. Bonds also typically don’t protect against inflation. If interest rates or inflation go up, the yield on a bond doesn’t go up with them as it is fixed at the time of issue.