High-profile income managers are taking steps to hedge against inflation in the belief it will rise because of the Bank of England’s quantitative easing measures.
Tony Nutt, the manager of the £2.7 billion Jupiter Income Trust, expects rising inflation as the government’s fiscal stimulus measures start to take effect.
In a conference call with inves-tors last week he said: “We will see much higher levels of inflation given the huge amount of quantitative easing we are seeing. This will inevitably mean a swing from bonds to equities.”
But he warned returns would remain weak for some time. “Many equity and corporate bond valuations reflect the deepest historical fears,” he said. “The returns of equities generally will weaken in 2009, especially in the financial sector.”
Bill Mott, the manager of the £374m PSigma Income fund, is also hedging inflation with a move back into the property sector. He estimates there is a 30% chance the government has acted too hastily to stabilise the economy, which could cause future problems. He says: “In our view, the authorities should delay quantitative easing until it is certain that recent aggressive initiatives have not worked. By starting quantitative easing so soon, there is a risk of creating a future inflation problem.”
To counter this, Mott has put 1% of the fund’s assets into property, including holdings in securities firms British Land, Land Securities and Hammerson. Property works as a hedge because it is a real asset that tends to rise in line with inflation.
“These companies are all currently having rights issues to pay off their borrowings and give themselves greater flexibility to buy property at the bottom of the cycle,” Mott adds.
The manager also increased gold exposure through shares in Central Rand Gold and bought BHP Billiton stock as a further hedge against inflation.
Meanwhile, Nutt said that banks had become an insignificant sector of the market for income managers since slashing their dividends.
He said dividends in America are at their weakest since 1955, and the same thing is happening in Britain.
“The banking sector is not an important sector any longer,” he said. “Lloyds is in the hands of the government, and for much of the sector, the equity is not of any particular value. Banks used to be a major contributor but they will be insignificant in terms of dividend payments until at least 2010.”