How to inflation-proof your ISA portfolio

For the past 12 months, COVID-19 has been the biggest worry for investors. But last month that changed.

According to the latest Bank of America* survey of fund managers, the Coronavirus has slipped to third place on the list of worries of professional investors. Instead, higher-than-expected inflation has become the number one concern.

This sentiment was echoed by Schroders’ James Luke on a webinar last week. James believes there is a possibility that, after 40 years of disinflation, COVID could have acted as a bridge into a new inflationary era.

“Between 1980 and 2020, the trend was one of de-regulation and free markets, globalised labour supply, just-in-time supply chains, independent central banks and mass movement of people,” he said. Inflation averaged just 2.5% in that time. “Today, central banks are more subservient, there is re-shoring of manufacturing and labour, and more of a focus on supply chain resilience.”

So as the end of the tax year draws near, do investors need to consider inflation-proofing their ISA portfolios?

As we discussed a couple of weeks ago, the inflation or deflation debate is dividing investors. Some believe that we will only experience it for a short time, while others believe it could become a longer term trend.

But clearly people are worried. Therefore it may be prudent for investors to include at least some inflation-linked protection within a well-balanced portfolio.

Four ways to inflation-proof your ISA

VT Gravis UK Infrastructure Income

Up to 70% of investment assets owned by listed infrastructure companies have an effective means of passing through the impact of inflation to customers**, making this sector a good way to add some inflation-proofing to a portfolio. The added benefit today is that governments around the world have also committed to ‘building back better’, so projects in this sector are also likely to increase.

VT Gravis UK Infrastructure Income invests mainly in investment trusts exposed to different types of UK infrastructure, from railways and roads to GP surgeries and solar power. It has an income target of 5% per annum, which is distributed quarterly, and offers exposure to a less volatile and higher-yielding area of the UK economy.

Ninety One Global Gold

Commodity prices typically rise when inflation is accelerating, so this asset class can offer some inflation protection as well. Gold, for example, has monetary backing, while silver also has a store of value and is further boosted by its industrial use. Other industrial metals like cobalt, copper and lithium are all huge drivers of production and are particularly attractive given the current infrastructure drive and global plans to tackle climate change.

The manager of Ninety One Global Gold worked in the metals and mining sector before becoming a fund manager. It is a concentrated fund investing predominantly in gold mining companies, but also has the ability to invest around one third of the portfolio in non-gold metals such as platinum, palladium, nickel or silver.

Rathbone Income

Low and rising inflation is good for equities but anything above 3% can be damaging, so it pays to think about the type of equities you are invested in in an inflationary environment. Companies that have the ability to pass price increases onto customers are one example, while cyclical stocks – those that benefit from an improving economic environment – are another.

Rathbone Income is a multi-cap fund, which gives investors exposure to a concentrated portfolio of UK companies with high quality and visible earnings. The manager is unconstrained in terms of sector weightings and is able to fully express his market views with the portfolio positioning. It currently has around half of the portfolio invested in financial, resources and consumer-led companies***.

Man GLG High Yield Opportunities

While inflation is generally bad for bonds, the higher income paid by high yield bonds, couple with the fact the companies that issue these bonds in tend to do better in an improving economic environment, can mean that this part of the fixed income asset class is less impacted by rising prices.

Man GLG High Yield Opportunities is an unconstrained, global high yield bond fund. The manager is ably supported by a team that conduct a rigorous analysis of every potential holding and their ability to meet debt obligations. It has a current yield of 6.8%***.

*Bank of America monthly survey, conducted among market professionals managing £430bn worth of money, March 2021
**First State Insights: Infrastructure as a hedge to inflation – May 2018
***Source: fund fact sheet, 28 February 2021