Spectre of inflation is trigger for investors to tweak portfolios

New research by interactive investor reveals the extent to which investors are reacting to the rapid rise in the cost of living. 

While Bank of England forecasts inflation to rise to 4% before the end of the year, few of us need reminding that an expensive Autumn and Winter appears locked in.

In a poll of interactive investor website visitors, 84% said they have noticed the impact of rising inflation in their day-to-day life, with 55% stating that it is one of the biggest threats to their personal finances.

Investors are starting to take action too. Some three-fifths (61%) of investors are worried about the impact of inflation on their savings and investments and of these, almost a fifth (18%) are already making changes to their investment portfolio, while just over two-fifths (44%) are not making changes.

The survey was conducted among 1,150 interactive investor website visitors between 24 – 27 September 2021.

Lee Wild, Head of Equity Strategy, interactive investor, says: “While more of us are feeling the squeeze on household budgets, the spectre of inflation has acted as a trigger for a significant number of investors to make changes to their portfolios. Global equities are key tool in an investor’s armoury to combat price rises, and there are plenty of strong companies paying inflation-busting dividend yields, which are, for now, also generating positive share price returns.

“Look for businesses that can easily pass on any increase in costs to consumers. However, any sustained period of high inflation could affect the economic recovery and negatively impact the stock market.”

Over a third (37%) of the sample said they are investing more money in the stock market, with over a fifth (22%) investing broadly in belief that stocks can go higher and 15% buying value stocks. This optimism is not shared by 12% of respondents who are reducing their market exposure over inflation concerns, while the majority (52%) of the sample said their investment strategy hasn’t changed.

Almost a fifth (18%) said they worry about their ability to cover high-cost outgoings amid rising prices, while 37% believe their finances can weather bumper costing pressures. Some 45% of respondents believe there are bigger issues to worry about.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “Investors looking to position their portfolios against high inflation and low growth should consider some exposure to Inflation linked bonds and real assets such as commodities, infrastructure and gold. But not at the expense of a broad, well diversified global equities portfolio – the ultimate inflation hedge.”

Myron Jobson, Personal Finance Campaigner, interactive investor, says: “With the cost of living on the up, it is important to pay closer attention to your financial wellbeing. This may translate to doing an emergency budget, cutting down on non-essential spending and squirrelling away more money into a rainy-day fund if you can afford to do so.”

Funds for an inflationary environment

Dzmitry, says: “We like Capital Gearing Trust which has two objectives: To preserve capital over any 12 months period and deliver returns well in excess of inflation over the longer term.

“It aims to achieve its investment objectives through a long-only, multi-asset portfolio of bonds, equities and property, with small holdings in infrastructure, gold, and cash. The team also use index linked government bonds and also gold and safe haven currencies.

“The trust has been managed by highly regarded investor Peter Spiller since 1982 and has delivered positive total returns in 37 out of 38 years. Also under his tenure the trust has been a great preserver of wealth in bear markets, including the dot-com crash and the Global Financial Crisis and most recently during market sell off in 2018 and 2020.

“We also like WisdomTree Enhanced Commodity ETF as a satellite holding as part of a well-diversified portfolio. It offers investors a broad and diversified commodity exposure, covering major commodity sectors such as industrial metals, precious metals, energy and agriculture.

“This ETF combines both passive and active investing. It aims to track the performance of the so-called rule-based index, the Optimised Roll Commodity, while looking to outperform the widely followed passive Bloomberg Commodity Index over the long term.

The fund is well positioned to benefit from the current market climate and potentially deliver higher real returns. Its effective cost management and lower risk profile gives the strategy a competitive advantage against other funds in the sector. Historically, investors turned to commodities as a source for portfolio diversification and hedge against rising levels of inflation.”