Four ways we are guarding against inflation – Smith & Williamson MPS

UK inflation CPI surged to 2.1% in May from 1.5% in April, exceeding market expectations and the Bank of England’s long-term target rate of 2%.

While Smith & Williamson Investment Management’s Managed Portfolio Service (MPS) does not anticipate inflation “roaring ahead” as the British economy continues to reopen, it does expect inflation to remain more elevated than it has been in previous years.

“The outlook for conventional bonds is less attractive in this environment and there is a need to diversify to asset classes and funds that will perform better when inflation is higher,” says James Burns, co-manager of Smith & Williamson Investment Management’s MPS.

Below are four ways Burns and the MPS team are protecting the portfolios against the corrosive impact of inflation.

Inflation-linked bonds

“We have been overweight index-linked bonds for almost 10 years and both the AXA Sterling Index Linked and ASI Global Inflation-Linked Bond funds sit in the lower-end of the portfolio to play the inflation theme. We are not expecting inflation to roar ahead but there does not need to be a huge uptick in prices for these to be beneficial to the portfolio. There is no currency exposure in either – they’re very much an inflation play.”

Value equities

“We hold a blend of value and growth funds in the portfolios and we expect the value contingent to perform better than pure growth funds over the coming period.

“Artemis UK Select, Man GLG Undervalued Assets and Premier Miton UK Multi-Cap Income are all longstanding positions which we have nuanced over the years. In an inflationary environment the value tilt of these funds should help their performance compared to that of growth funds.”

Short duration bonds

“We’re very underweight conventional bonds at the moment but where we do have exposure, we protect ourselves as far as possible by being short duration, through funds like AXA US Short Duration High Yield and Liontrust Monthly Income. Even our most vanilla fund, Artemis Corporate Bond, is quite short duration as well.”

Gold

“When we initially bought BlackRock Gold & General in the portfolios in December last year, it didn’t have an immediately beneficial impact. However, we bought the fund with a longer-term view to diversify returns and provide some protection in challenging markets. This is a move that we expect will pay off as we transition into a more inflationary environment.”