Multi manager verdict: Has inflation made real assets attractive?

John Chatfeild-Roberts, head of strategy, Jupiter Independent Funds Team

Inflation hasn’t much troubled investors these past few years; on the contrary the trend has been towards disinflation (decelerating prices) if not outright deflation (falling prices). But with inflation reappearing, albeit not yet at a rate that is troublesome (most western central banks are actively targeting 2 per cent inflation, it helps grease the economic wheels), how best to help preserve the real value of investors’ capital?

There is much talk of investing in ‘real assets’, including gold, property and infrastructure. The Jupiter Merlin Portfolios are all invested in physical gold as a hedge against inflation and also as protection in the event that current monetary policy goes awry.

Two, Merlin Income and Merlin Balanced, are invested in secondary commercial property in the UK through a bespoke fund; we have inflation protection through the contractual ability in the leases to raise rents, as well as the potential for capital growth.

Infrastructure, while attractive in principle, is more problematic in practice: the investment wrappers for such opportunities are often inherently illiquid, a strong disincentive for daily dealing funds such as ours.

We believe equities too are real assets: shares in companies which have strong balance sheets with physical assets and brands, those which are price-setters rather than price-takers and have the ability to generate cash both to reinvest and pay out as dividends, these also are attractive investments in an inflationary environment.

Ben Kumar, investment manager, Seven Investment Management

While real assets can be part of an investment approach, they are not necessarily the golden ticket that many believe them to be, even in a growth environment.

The first problem is that many investors will already have a large position in real assets – their own home. Concentrating further into domestic real estate goes against the principles of diversification that multi-asset investing is founded on.

Commodities also tend to feature on lists of inflation-protecting real assets. However investors should consider that the price of, say, copper or iron ore rising or falling may not really feed through into their lives – correlation with their own basket of goods is likely to be imperfect (I guess unless you are a plumber or a blacksmith).

Equities are another part of the solution. In general, when inflation is rising, equities will rise too. Of course, stock markets in the short term can be very volatile and can be impacted by a number of other factors but over the long term, as earnings rise, equities should protect your spending power. On any given day, week, or month though, that may not be the case!

One of the things we have been doing recently is looking at explicit inflation protection, through the purchase of instruments called inflation swaps. These are like having just the inflation guarantee part of an inflation linked bond. They rise in value as inflation rises making them more aligned with the inflation protection that investors are likely to be looking for.

James de Bunsen, multi asset fund manager, Henderson Global Investors

The key determinant for real assets is whether this latest uptick in inflation is sustainable. To my mind, China is behind a large proportion of the reflation trend of recent months, following a huge dose of fiscal and monetary stimulus in 2016, which created a global inflationary impulse.

Of course, more recently this also coincided with the strong recovery in oil prices, which feed fairly directly into many inflation measures. Recently however the flow of credit in China has slowed sharply as the government seeks to cool down the economy. This generally has a lagged effect on various activity measures and in turn inflation. But with a particularly important National Congress to be held in the autumn this year, in which the Communist Party leadership structure will be overhauled, it is unlikely that the brake will be applied too firmly.

Meanwhile, the world will still face a more structural battle against three major deflationary forces – ageing demographics, unsustainable debt levels and job-threatening technological advances.

We think social infrastructure still looks appealing, given its high inflation linkage, relatively high yield and implicit government backing; although, on some metrics it does look expensive. We prefer German property over a potentially vulnerable UK commercial market, given the greater potential for rent increases. Meanwhile, we are more wary of the broader commodity complex, which will be very sensitive to any sign of a Chinese slowdown, but believe gold is a sensible addition to any properly diversified portfolio.