Fund tips to beat inflation

13th August 2013

With inflation running at 2.8 per cent, savers could see the value of their cash cut in half over 25 years writes Philip Scott.

It was announced this week that the inflation, as measured by the Consumer Price Index dropped back to 2.8 per cent in July, from 2.9 per cent in June 2013. While any fall is to be welcomed, this reduction hardly calls for celebration.

Since the financial crisis, inflation has remained stubbornly above the 2 per cent target set by the Government.

Inflation, which marks a rise in the cost of everyday living or to put it another way – a fall in the value of money, spells misery for savers as their cash’s worth is eroded over time and more has to be spent to buy the same items.

Since interest rates dropped to their all-time low of 0.5 per cent more than four years ago, in March 2009, prices have risen by almost 15 per cent while the value of cash has only managed to grow by 3.39 per cent.

This means that with the current low levels of interest, the value of savings has been eroded by 11.47 per cent since 2009 with millions are seeing their savings and spending power slashed.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20 per cent, would have the spending power of just £8,842 today according to comparison hub, Moneyfacts.

And savers can expect interest on their savings to remain below inflation for another three years as the Bank of England, which sets the interest rate has forecast rates may remain low until 2016, as it plans to keep them at their current level until employment in the UK improves.

Adrian Lowcock, senior investment manager at fund broker Hargreaves Lansdown: “Inflation also affects our real income. With wages frozen, household incomes are being eaten away by inflation.  Inflation matters to all of us, whether we are working or retired, savers or investors as it measures the rate at which the costs of goods and services rise.”

Investors can protect their savings from the effects of inflation by investing in a range of assets which are able to grow faster than inflation including shares and even gold.

What can beat inflation?

Gold has long been a traditional hedge against inflation and in spite of the recent fall in the market the long term fundamental drivers for the gold price remain intact says Lowcock.  Equities offer attractive inflation proofing as some companies are able to pass on any rises in costs to the consumer and therefore protect their profits. Companies can also grow their business which means they can increase profits and raise the dividend.

For his part Lowcock tips the Troy Trojan fund. Its manager Sebastian Lyon has exposure to gold and gold mining equities; inflation-linked government bonds in the UK and US; and cash. Lowcock says: “He still believes in the case for gold despite a sharp fall in the price recently. He took the fall as an opportunity to add to his holding, suggesting the ultimate debasement of paper money through inflation and quantitative easing (QE) makes a strong case for having gold within the portfolio.”

Lowcock also rates the Threadneedle UK Equity Income Alpha fund.  As an equity income fund, the portfolio concentrates on investing in dividend paying firms – i.e. corporations that share their profits with their investors.

He adds: “The fund maintains a core of solid, reliable companies, who have demonstrated an ability to pay consistent dividends. In our view, the fund maintains an edge over some of its larger rivals as it remains relatively small, meaning it has the flexibility to invest more heavily in medium-sized companies. In addition, the fund remains concentrated at only 37 stocks. We favour this high conviction approach as it means each holding will make a real difference to performance, though it does increase risk. The fund yields 3.6 per cent.

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