Page 19 - DIY Investor Magazine | Issue 34

The mechanics in March illustrates how the diversified portfolio offers positives that offset negatives; long-dated inflation-linked bonds (‘linkers’) fell in value as yields rose faster than inflation expectations, but interest rate options – which profit from rising yields – more than offset this fall in value. Gold exposure (now at close to 10%, including and gold mining equities) were the largest positive performance driver during the month.
TROY, managers of Personal Assets Trust (PNL), aims to protect and increase (in that order) shareholders capital. Managed by Sebastian Lyon and Charlotte Jonge, the team aims for resilience for a variety of short-term scenarios without compromising its ability to generate long-term returns.
They have long seen inflation as a coming threat, and are exposed to short duration assets, including cash and T-bills of c.19% of NAV, and equities of companies with resilient business models where revenue and earnings growth
will be long-lived, but also where the valuations do not overstate the company’s potential (c 36% of NAV). Index linked bonds representing 33% and gold bullion and gold related investments at 12% of NAV represent their direct inflation hedge. However, exposure to index linked bonds does not guarantee profits in an inflationary environment, as shareholders in Personal Assets discovered during Q1.
They have a slightly different approach to the equity element of the portfolio, despite having a similar 35% invested in index linkers.
4% of the portfolio is invested in energy and materials
stocks, the largest position being a European energy ETF; they also see renewable infrastructure trusts (5% of the portfolio) as attractive. CGT continues to think that residential accommodation (c. 10% of the portfolio) looks well placed. Please register to receive an alert when an updated profile on CGT is published.
CONCLUSION
Relatively few market participants will have had a view of financial markets when we had ‘proper’ inflation, so it makes sense to have a range of different exposures which should mitigate the risk that ‘this time it’s different’.
However, in our view, the most direct exposures one can
take to benefit from short term inflation are the likes of HICL
or Greencoat UK Wind. Both have contractually linked
inflation protection as elements of their underlying revenues. Commodity and related exposures are also likely to perform strongly, although clearly at risk of the impact of a potential global recession denting demand. At the other end of the spectrum, several multi-asset trusts offer differing recipes for similar cakes, each aiming to provide long term preservation of real wealth. Each of these offers a relatively neat way to outsource the problem to the teams of powerful thinkers that sit behind each one.
Disclaimer
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Troy explains it well: whether index-linked bonds make money depends on the degree to which nominal rates and inflation expectations move. If expectations for inflation increase more than nominal bond yields, real yields fall and index-linked bonds generate positive returns. However, if markets price in an increase in nominal yields without a commensurate increase in inflation expectations, real yields rise and index linked bond values decline. During Q1 the latter happened, causing index- linked bond prices to fall.
They believe the US in particular will find it hard to raise rates as much as is necessary and that inflation expectations currently priced in are too low; they have a positive outlook for their portfolio of index linkers (duration of 5 years) going forward.
Peter Spiller and team at Capital Gearing Trust (CGT) also worry about inflation; its objective is to preserve, and over time to grow shareholder’s real wealth. The team share Troy’s view that inflation expectations are too low, and so the portfolio is invested in linkers with ‘moderate’ duration.
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DIY Investor Magazine · July 2022