The Assets That Are Beating Inflation, And The Ones Falling Short

The Assets That Are Beating Inflation, And The Ones Falling Short
Sam Benstead via interactive investor

3 months ago4 mins

Maintaining the “real” value of your wealth is one of the main reasons for investing, but periods of high inflation can make this a very difficult task.

Over the past three years, the consumer price index (CPI), the most widely used inflation measure, has risen a cumulative 18% in the US and 21% in the UK. And although inflation has been falling, the past three years have been incredibly damaging to the real wealth of many investors.

Still, some investment sectors have managed to deliver impressive inflation-adjusted returns, even as other sectors – some of which you might have expected to protect against inflation – have disappointed.

Some funds and sectors beat inflation.

Data from FE Analytics shows that just six of the Investment Association’s 57 fund sectors delivered returns above 21% from mid-November 2020 to mid-November 2023.

They were India (up 52% gain on average), commodity/natural resources (46% gain), Latin America (30%), North America (29%), global equity income (25%) and UK equity income (23%).

Equity income strategies would have been expected to perform well during periods of high inflation as adding dividends to total returns gives investors a regular return. Dividends in high-quality companies can also rise with inflation, as companies can increase prices and therefore profits.

The other big theme was funds exposed to natural resources. Mining and oil companies have had a fantastic three years, as higher commodity prices (which were one of the main causes of high inflation), led to bumper profit and dividends for that sector. Commodity stocks are prevalent in UK equity income funds, and among Latin American companies.

The strong performance of Indian shares is linked to its economy and politics, with investors moving money out of China, which is deemed too risky politically, and into India, where a democracy of more than one billion people is welcoming foreign investment. India also has a very young population, compared to China’s aging population.

Breakthroughs in artificial intelligence, meanwhile, have boosted North American funds, with the “magnificent seven” of Apple, Microsoft, Nvidia, Meta, Alphabet, Amazon, and Tesla driving markets higher.

Some of the top funds over the three years include: Jupiter India (up 97%), Liontrust India (up 73%), iShares Oil & Gas Explr & Prod ETF USD Acc GBP (up 241%), BlackRock – BGF World Energy (up 205%), and WS Guinness Global Energy (up 198%).

The top North American funds over three years include BNY Mellon US Equity Income (up 73%) and FTF – ClearBridge US Value (up 64%), and the top UK equity income funds include Schroder Income (up 71%), and TM Redwheel UK Equity Income (up 64%).

But “real” returns have largely been negative.

Unless you invested in those six sectors, the likelihood is that your returns have been negative over the past three years when adjusted for sky-high inflation.

A number of themes emerge among the losing sectors.

First, bonds have been hammered as a result of rising interest rates and high inflation. Bond prices generally fall as interest rates rise, as newly issued debt will come with a higher yield than existing debt. Inflation also corrodes the relative value of the fixed income on offer.

Bond losers include sterling corporate bonds (in which the average fund is down 12%), global corporate bonds (down 9%), and UK gilts (down 26%).

But the biggest bond sector loser has been the UK index-linked gilts, where funds fell 32% on average. Inflation-linked bonds adjust their coupon and principle for the RPI inflation rate, but they tend to have very high “duration” and that makes them more sensitive to interest rate changes, as they have a long period before they mature.

With bond yields now higher (a result of lower prices), investors can now expect to receive an inflation-beating return from the sector, as debt yields are above inflation rates, called “positive real yields”. Professional fund managers recently concluded that bonds would be the best-performing asset class in 2024.

Investors in China have also suffered a lot over the past year, with the typical fund falling 35%. China’s extended lockdowns and its slow recovery from the pandemic, as well as geopolitical tensions with Taiwan and the US, have hurt sentiment.

Meanwhile, smaller companies, which tend to be affected by economic problems and come with higher valuations, also struggled as inflation rose. The UK smaller companies sector fell nearly 5%, while European smaller companies rose just 2%, and North American smaller companies rose just 7%.

Real assets, such as property and infrastructure, also failed to beat inflation. UK direct property rose 3.5%, while Infrastructure rose 7%. Property and infrastructure cash flows tend to rise with inflation, but valuations of assets fell as investors moved money into the bond market, where income is now higher because of all those interest rate rises.

Losing funds included AXA Sterling Index Linked Bond (down 43%), Fidelity Index Linked Bond (down 44%), Baillie Gifford Investment Grade Long Bond (down 34%), Schroder Long Dated Corporate Bond (down 38%), Jupiter UK Smaller Companies Focus (down 32%), Octopus UK Micro Cap Growth (down 23.5%), GAM Star China Equity (down 47%), and Templeton China (down 47%).

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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