How to invest your nest egg to beat rising prices as inflation hits six-month high

Just as inflation hit a surprise six-month high of 1.8 per cent last week, National Savings & Investments joined the big banks in slashing its savings rates and cutting prizes on its Premium Bonds. 

Meanwhile, the stock market is feeling the effects of the coronavirus epidemic, making it harder to earn returns.

So what can investors do to stop their savings being eroded by the rising cost of living? There is salvation to be found in unexpected places – including Britain’s drive to build more hospitals, roads and transport networks.

The companies behind Britain’s infrastructure often have long visible public contracts and clauses relating to inflation written into them

‘The Government is about to go on an infrastructure investment blitz,’ says Jason Hollands at investment management firm Tilney. He believes companies who build this infrastructure often offer strong inflation-proofing characteristics.

This is because their income is often very visible – contracts can be 25 years in length – so by investing in them you aren’t relying on the annual whims of the market.

Many infrastructure projects have clauses relating to inflation in their contracts. This means that they can raise the price they charge clients – in this case the Government – as inflation rises. This is important when agreeing to a 25-year project.

Even when there is no contractual obligation, infrastructure firms are generally influential enough to pass price rises on to their clients.

Traditionally, it has been hard for individual investors to gain exposure to infrastructure projects, which have typically been funded by large institutions.

 But in recent years there have been a number of stock market-listed infrastructure investment trusts offering attractive returns to income-seekers. 

Hollands recommends International Public Partnerships (INPP), which is a global infrastructure fund with almost three quarters of the projects it invests in within the UK. These include the new Revenue & Customs office in Liverpool and court buildings in Derbyshire.

INPP is also building many British schools, with contracts that often extend to school maintenance and day-to-day management, providing yet more inflation-proofing. ‘Projects are under very longterm contracts – more than 25 years – and often include inflationary adjustments to revenues,’ Hollands explains.

Tilney's Jason Hollands believes the companies behind Britain's upcoming infrastructure blitz make for good inflation-proof investments

Tilney’s Jason Hollands believes the companies behind Britain’s upcoming infrastructure blitz make for good inflation-proof investments

INPP yields an inflation-beating 4.3 per cent. This is far above the 1.8 per cent figure for the Consumer Prices Index measure of inflation, released on Thursday, and even beats the 2.7 per cent figure for the Retail Prices Index.

 Hollands’ second pick is HICL, the company behind Oldham Library in Greater Manchester, and a large number of the UK’s fire stations, including those in Dorset, Gloucester and Tyne & Wear.

HICL has a yield – the annual dividend paid to shareholders divided by the share price – of 4.4 per cent. 

And once the increase in the share price is factored in it has returned 13 per cent in the past year, 27 per cent in the past three years and 50.8 per cent in the past five years.

Infrastructure aside, other funds with inflation-proofing characteristics include those invested in inflation-linked bonds, where payouts to investors rise and fall with the inflation rate. 

Typically, these are used to fund reliable government debt such as gilts – British Government bonds – or US treasuries. One fund that invests heavily in these types of bonds is the Personal Assets Trust, a stock market-listed investment trust with a focus on beating inflation. 

It has a third of its portfolio in US treasury inflation-protected securities. Other holdings include gold bullion, which is also seen as offering protection against inflation. 

‘Personal Assets Trust won’t shoot the lights out when the stock market is doing extremely well, but it has a strong record of steady-eddy returns and will hold up well during tough periods,’ says Hollands.

A similar fund is AXA Distribution. It mainly invests in blue chip British shares to generate returns, but has more than a third of its portfolio in UK index-linked bonds to reduce volatility and provide some inflation proofing. 

The fund has returned nearly 11 per cent this year, and an average of 5 per cent annually over the past three years.

Risk-averse investors might also consider a fund with a low risk profile, containing assets that typically help combat inflation.

Dzmitry Lipski, head of funds research at investment platform Interactive Investor, recommends the Vanguard LifeStrategy 20 Per Cent Equity Fund as a ‘gentle introduction to investing’ for those concerned about inflation eroding cash savings. 

A fifth of the fund is invested in equities (shares), but the remainder is invested in bonds and other fixed-interest deals.

‘A closer look under the bonnet reveals that the majority of the portfolio is invested in bonds on the low end of the risk spectrum,’ Lipski says. Almost a third is invested in government bonds, while 19 per cent is in corporate bonds.

The fund boasts a solid track record, returning 9.6 per cent over the past year, 15.4 per cent over the past three years and 28.2 per cent over the past five years.

‘This far outstrips cash returns over the same period,’ says Lipski.

Those who don't consider the impact of inflation could see their nest egg wither away

Those who don’t consider the impact of inflation could see their nest egg wither away 

Taking risks with your capital might seem daunting, but those who don’t consider the impact of inflation on their money are likely to suffer over time. Over ten years, for example, inflation at 1.75 per cent would turn the value of £10,000 cash into £8,400 if there was no growth in its value.

‘Taking what appears to be “no risk” in the case of cash savings is actually a risky strategy in itself,’ says Lipski. But if you really can’t afford to risk your capital declining in value due to stock market tremors, and are able to tie up your money, there are some cash accounts that beat inflation – just.

If you fix for three years, the Bank of London & The Middle East offers 1.85 per cent on its Premier Deposit Account, and Gatehouse Bank’s Shariah-compliant Fixed-Term Deposit offers 1.82 per cent.

Savings of up to £85,000 in both of are backed by the Financial Services Compensation Scheme.

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