Richard Troue: Retired are hit hardest by toxic mix of inflation and low interest rates

The Analyst

Most of the industrialised world is enduring interest rates which are persistently lower than the rate of inflation. This has occurred before – most notably when inflation was running at 25 per cent in the mid-1970s.

There are implications for savers, and especially for people who depend on their savings for income. The problem is aggravated for the retired, as their personal rate of inflation is probably greater than the published figure. Official figures take into account many items which have come down in price but which are discretionary purchases, such as computers and other hi-tech gadgetry.

On the other hand essentials – food, power, water, council taxes, etc – are all increasing in price, meaning retired people on fixed pensions or dependent on income from their investment capital are the hardest hit by the current situation.

Furthermore, the change to the Bank of England's remit could have long-term consequences. The Bank is still required to target an inflation rate of 2 per cent, but the change allows it to "look through" the inflation figures and target other variables, such as economic growth. This is a signal that the Government is prepared to tolerate higher inflation in exchange for a faster recovery.

I don't see the toxic combination of inflation and low interest rates coming to an end soon. Those with debt (such as the Government) will benefit, as they continue to borrow cheaply while higher inflation erodes the value of their debt. Meanwhile savers are seeing the purchasing power of their capital chipped away.

In their search for inflation-beating returns many investors have turned to the stock market. However, for most investors having all their capital in the stock market is not prudent. Fortunately there are options which exhibit lower volatility.

Traditionally corporate bonds have been a good choice for investors who want a better return than available on cash, but with less risk than the stock market. Unlike shares, with corporate bonds you are simply lending a company money, in return for which it should pay you an annual rate of interest. As long as the company remains solvent it pay the interest and when the bond matures repay the initial sum loaned.

The trouble with corporate bonds is that the income they pay, and their capital, are often fixed, so they offer no shelter against inflation. However, some companies and governments issue index-linked bonds, where the value of any income paid and the capital repaid at redemption increase annually in line with inflation.

These are exactly the types of bonds the M&G UK Inflation Linked Corporate Bond Fund targets. It aims to provide a return above the rate of inflation over the long term by investing partly in a portfolio of index-linked UK government and corporate bonds. In addition, the managers use derivatives to add an element of inflation-linking to their corporate exposure. Derivatives are also used to reduce the sensitivity of the fund to rising inflation or interest rates.

The result is a portfolio which should appeal to more cautious investors. It doesn't offer the potential for significant gains, but since launch in September 2010 it has maintained the purchasing power of investors' capital, growing by 12.5 per cent compared with a rise of 9.3 per cent for the consumer price index. It has achieved this with little volatility, particularly when compared with the stock market. Investors should also remember that if they buy this fund in a stocks and shares Isa there is no tax to pay on any growth or income.

The fund is managed by the experienced duo of Jim Leaviss and Ben Lord, who believe that central banks will continue to tolerate higher inflation. They are concentrating on inflation-linked bonds issued by large, stable companies, as they believe the yields offered by index-linked government bonds have fallen too low. The active use of derivatives, though, introduces risks not present with more traditionally managed funds.

This fund could be considered by investors who wish to protect the spending power of their capital against inflation, but who wish to take a more cautious approach. It could also be used to diversify and reduce the volatility of a more equity-focused portfolio.

Richard Troue is an analyst at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
Sport
Jonas Gutierrez (r) competes with Yaya Toure (l)
football

Newcastle winger is in Argentina having chemotherapy

Arts and Entertainment
Blossoming love: Colin Firth as Stanley and Emma Stone as Sophie, in 'Magic in the Moonlight'
film

Actors star in Woody Allen's 'Magic in the Moonlight'

PROMOTED VIDEO
News
peopleThe Times of India said actress should treat it as a 'compliment'
News
news

Watch this commuter wage a one-man war against the Circle Line
News
We are phenomenally good at recognising faces; the study showed that humans have been selected to be unique and easily recognisable
science

Human faces unique 'because we don't recognise each other by smell'

Arts and Entertainment
You've been framed: Henri Matisse's colourful cut-outs at Tate Modern
artWhat makes a smash-hit art show?
Property
Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
News
A male driver reverses his Vauxhall Astra from a tow truck
news

Man's attempt to avoid being impounded heavily criticised

Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Student
The Guildhall School of Music and Drama is to offer a BA degree in Performance and Creative Enterprise
student

Arts and Entertainment
Emma Thompson and Bryn Terfel are bringing Sweeney Todd: The Demon Barber of Fleet Street to the London Coliseum
theatre

Returning to the stage after 20 years makes actress feel 'nauseous'

Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Arts and Entertainment
Robin Thicke and Pharell Williams in the video of the song, which has been accused of justifying rape
music...and he had 'almost no part' in writing it
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Payroll & Accounts Assistant

    £20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

    SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

    £280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week