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With inflation now almost 3%* and cash savings rates languishing near zero, the value of our money is being eroded at its fastest rate for some time. If inflation continues at this rate for the next three years, £1000 in a cash savings account could be worth as little as £920. That’s an 8% fall in value of a ‘safe’ asset.
Here are three ways to invest to beat inflation:
Because the income paid by bonds is usually fixed at the time they are issued, high or rising inflation poses a problem because it erodes the real return you receive – just like cash. To mitigate this risk there are two options: either invest in a fund such as AXA Sterling Credit Short Duration Bond, which only invests in bonds close to maturity, or find a bond fund that pays a high enough yield to provide a cushion. Schroder High Yield Opportunities, which has a yield of 6.18%** and TwentyFour Dynamic Bond, which invests across the fixed income market and currently has a 4.76% yield** are worth a look.
Some companies do better than others in inflationary environments. Cash generation and pricing power can provide a buffer for a company, enabling it to self-fund its operations and offset rising costs by passing them on to customers. Evenlode Income invests in companies with these characteristics. Infrastructure is another good option. Assets owned by infrastructure funds, such as toll roads, have pricing that is linked to inflation. Here, you could consider First State Global Listed Infrastructure.
Alternatively, you could just decide to place your faith in UK plc. Fidelity Enhanced Income has a yield of 6.35%, while City of London Investment Trust has a yield of 3.91% and a fantastic record of raising dividends over more than 50 years. As we start to extricate ourselves from Europe, volatility is likely to rise – which could create opportunities for talented stock-pickers.
*UK inflation, as measured by CPI rose to 2.9% in August 2017, according to the Office of national Statistics.
**Source: FE Analytics as at 12 September 2016