Interactive Investor

A tactic to ride out the inflation storm using these funds and trusts

23rd March 2022 10:12

by Kyle Caldwell from interactive investor

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Here are some fund and investment trust ideas for investors on the lookout for funds with plenty of inflation-linked assets.

High inflation 600

Assets that can preserve the real value of investors’ capital are often thought of as offering protection against rising levels of inflation.

Real assets include property, infrastructure, renewable energy infrastructure, and leasing. Exposure to government-backed and inflation-adjusted income is a key attraction of such investments, particularly at the moment with UK inflation at a three-decade high of 6.2%.

In addition, as part of a diversified portfolio real assets can help to reduce risk alongside generating income.

For investors on the lookout for funds with plenty of inflation protection in their portfolios two of the options are FTF ClearBridge Global Infrastructure Income and FP Foresight Global Real Infrastructure.

Legg Mason IF ClearBridge Global Infrastructure Income, which is a member of interactive investor’s Super 60 list, told our Funds Fan podcast the fund has over 90% direct and indirect exposure to inflation-linked assets.

The fund invests in a diverse basket of global listed infrastructure assets in various sub-sectors such as water, utilities, gas, and electricity.

Charles Hamieh, co-manager of FTF ClearBridge Global Infrastructure Income fund, said that inflation is one of the key attractions for infrastructure as an asset class.

He explains: “There are mechanisms in regulation or concession agreements which allow inflation to be passed through. If you think about a utility – rising inflation or rates will have little impact on valuations as inflation is passed through either directly or indirectly to the user of that asset. Regulation can differ globally….but in essence regulation is designed to protect the return utilities receive from capital investment against those macroeconomic changes, especially inflation."

Hamieh adds that transport infrastructure is no different. Toll road pricing, for example, is often linked to inflation. While this hits users in the pocket, it gives toll road companies pricing power.

FP Foresight Global Real Infrastructure, which a member of interactive investor’s ACE 40 ethical list of rated investments, has 70% of its underlying assets directly linked to inflation, with the remaining 30% indirectly exposed.

In another of our Funds Fan podcasts its fund manager Nick Scullion explained: “The types of companies we invest in have long-dated cashflows – 20 plus year cashflows contracted with governments or highly creditworthy counterparties and these are mechanically-linked to inflation. So within those contracts there is a clause that escalates the revenue payable on an annual basis in line with an inflation measure.”

FP Foresight Global Real Infrastructure invests in the publicly traded shares of companies that own or operate real infrastructure or renewable energy assets anywhere in the world. In addition, the fund only invests in companies delivering a net social or environmental benefit and meets the principles of the United Nations Global Compact, which are a set of guidelines for investing ethically.  

On the whole, infrastructure has predictable cash flows that gives the asset class considerable defensive qualities. However, investors should be wary of viewing it as a panacea. Listed infrastructure is an equity, so is correlated to the up and down fortunes of stock markets. Moreover, it is a diverse asset class – comprising both old economy sectors and new economy sectors, such as renewables. Such assets perform differently from one another.  

Recent research by the Association of Investment Companies (AIC), the trade body for the investment trust industry, gave examples of investment trusts that have plenty of inflation protection. 

LXI REIT (LSE:LXI), which invests in UK property, has 96% of rental income index-linked or fixed uplifts. Simon Lee, co-manager of LXI REIT, said: “Our portfolio is expected to continue to deliver attractive, defensive inflation protected income returns and capital growth to our shareholders going forward.”

The Value and Indexed Property Income Trust (LSE:VIP), which invests mainly in directly held UK commercial property, has 92% of contracted rental income on index related leases. Louise Cleary, manager of Value and Indexed Property Income Trust, said: “The trust’s shareholders are therefore well placed to benefit from the current surge in inflation, which will feed through into increased rents, earnings and, in due course, valuations for the trust.”

Two other examples are Tritax EuroBox Euro (LSE:BOXE) and GCP Infrastructure Investments (LSE:GCP), whose portfolio of investments have respective inflation protection of 78% and 52%.

Annabel Brodie-Smith, communications director of the AIC, makes the point thatreal assets are generally illiquid and cannot be readily sold to meet investor redemptions. This isn’t a problem for funds that invest in the shares of infrastructure funds. However, it can be an issue if there’s a rush to the exits for funds that invest directly in real assets, such as property or infrastructure.

She says: “The investment company structure provides a tried-and-tested way of accessing these assets while being able to trade your shares whenever the stock market is open.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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