How to beat inflation – an investor's guide
As the cost of living rises and interest rates remain low, Chiara Cavaglieri and Julian Knight suggest ways to make the most of your portfolio
Sunday 20 February 2011
No matter where you put your savings, it's certain that you are losing money every day. Inflation moving to 5.1 per cent last week means that prices are rising at a faster rate than even the best savings rates pay in interest.
If you want to keep up with the cost of living you have to cast your net wider than a savings account. So where can investors get some inflation protection in their portfolios?
Equity income funds
Equity income funds offer investors the chance to generate income by investing in companies that pay a dividend to shareholders. There is the additional opportunity for capital growth in the underlying value of shares and increasing dividends.
Funds to look out for include Artemis Income, which has solid companies with strong balance sheets such as Vodafone and HSBC as its top holdings and yields 4.1 per cent. Other big names such as Neptune Income and Threadneedle UK Equity Income.
"Equity income funds have generally done well since they invest in profitable well-run companies with a history of paying dividends," says Danny Cox from independent financial adviser (IFA) Hargreaves Lansdown.
Inflation beater rating: 8/10
Investing in emerging markets is inherently risky, but with this comes far greater opportunity for growth. This usually means the emerging markets of the Bric economies (Brazil, Russia, India and China). Despite the potential for political and economic instability, most experts agree that developing markets still offer potential for inflation-beating returns.
"The long-term argument for them remains very much intact, and good fund managers such as Aberdeen Global Emerging Markets and First State Asia Pacific Leaders, both with a defensive bias, may ride out the storm in good shape," says Rob Burgeman of stockbrokers Brewin Dolphin.
Inflation beater rating: 8/10
Commodities are another asset class with a good track record of outperforming inflation, and growth in this sector is linked to the strength of emerging markets.
Gold is often touted as the best way to protect against inflation by holding its value when currencies are weak. Access to commodities can be gained easily through exchange traded funds (ETFs) which are low cost and track the price of each commodity. Investors can also gain through natural resources funds such as the Investec Enhanced Natural Resources Fund, but as commodities can be volatile, many experts advise holding more than 5 per cent in your portfolio.
"Agricultural, industrial and energy-related commodities have structural causes for price strength in the long term. These sectors have done well, but for the long term consider Eclectica Agriculture, Blackrock World Mining and Martin Currie Global Energy," says Simon James from Gore Browne Investment Management.
Inflation beater rating: 7/10
For those willing to take a bit of risk, experts argue that smaller companies have greater potential to grow rapidly. Here, stock picking is critical, so stick to funds with good track records such as Investec UK Smaller Companies and Standard Life UK Smaller Companies.
"At home, real companies making real things, earning real profits and paying real dividends could hold their value over the longer term, although they could see some volatility along the way," says Mr Burgeman who backs Nigel Thomas at Axa Framlington UK Select Opportunities.
Inflation beater rating: 7/10
Direct share investment
One of the highest risk/reward investment approaches is to buy shares in a company in the hope that they will pay a good dividend and enjoy capital growth. Large blue-chip companies offer a degree of security. Mr James recommends the "usual suspects" including GlaxoSmithKline, Astra Zeneca, British American Tobacco, Imperial Tobacco, Vodafone, Unilever, SAB Miller and Centrica, as well as Kier Group.
However, direct share investment is high risk and many investors prefer to go with a unit or investment trust fund where the manager invests your cash in lots of companies.
Inflation beater rating: 7/10
Ordinarily, bonds are the last place to turn when inflation is getting out of hand because it will usually drive interest rates up. As bonds mostly pay a fixed income, the price will then fall to compensate for higher interest rates. However, there are inflation linked bonds. The payoff is that the interest paid starts off at a much lower level than on conventional gilts but investors are protected by returns linked to RPI. If you don't want to pick individual gilts, look at M&G UK Inflation Linked Corporate Bond Fund and the Barclays iShares GBP index-linked gilt fund.
Strategic bond funds are riskier than corporate bonds but more flexible. Managers are given more freedom to hold and switch to different types of bond. Funds with good track records include M&G Optimal Income and Jupiter Strategic Bond Fund.
Inflation beater rating: 7/10
When you consider capital growth from property price rises as well as rental income, property should be an attractive prospect. Those who don't want the hassle of a buy-to-let can gain exposure via property funds such as Threadneedle Property Fund.
However, stunted economic growth will not help demand. "The outlook for commercial property is clouded by the outlook for the general UK economy and looks particularly poor outside London," says Mr Burgeman. He highlights real estate investment trusts such as British Land and Land Securities which offer generous dividend yields at 4.7 per cent and 3.9 per cent respectively.
Inflation beater rating: 6/10
Donald MacInnes: 'I have to have £500 a month spare from now until at least 2035'
HSBC becomes first bank to offer five-year fixed rate mortgage with interest rate under 2%
Are finance apps stealing your personal data?
Crippling PFI deals leave Britain £222bn in debt
Pension freedoms: How to deal with cold calls from scammers
- 1 Rarest Beanie Baby bought for just £10 at car boot sale could be sold for £62,500 on eBay
- 2 Katie Hopkins and The Sun editor David Dinsmore reported to police for incitement to racial hatred following migrant boat column
- 3 Giorgio Armani criticises the way some gay men dress saying 'a man has to be a man'
- 4 Rebecca Francis accuses Ricky Gervais of using 'influence' to target female hunters after receiving barrage of death threats
- 5 Australian student Tommy Connolly, 23, adopts his pregnant, homeless 17-year-old cousin to give her a chance at 'a better life'
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...
£30 - 35k (DOE): Guru Careers: We are seeking a Pricing Analyst with experienc...
£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...
£21000 - £24000 per annum: Ashdown Group: The Ashdown Group has been engaged b...
Day In a Page
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000