Two investment managers gave their three best stock picks to beat inflation today, after UK inflation hit another forty-year high in July.
Real assets and investment trusts that deliver consistent dividends can help investors beat rising inflation, according to these managers.
Alternative investment manager Atrato Group advised that real assets—namely groceries, green energy and social housing—can help shore up portfolios against inflation fluctuations.
Steve Windsor, co-founder of Atrato, said investors should look beyond traditional asset allocations for long-lasting inflation-linked returns.
Investors should reposition their portfolios to focus on real assets, “where value is intrinsically linked to inflation”, for example through rents or long-term agreements, according to Windsor.
He warned that tech stocks are now “much riskier assets to hold in a higher cost of capital environment”.
By contrast, real assets such as infrastructure, real estate and commodities offer inflation-linked returns that he said are resilient in an inflationary environment.
Three real asset picks
Windsor said the grocery sector “remains fairly insulated from economic conditions” due to its indispensable nature.
Supermarkets have passed on a majority of inflation cost pressure to the consumer and protect their margins.
Green energy is another asset favoured by Atrato Group, amid an environment of soaring energy prices, as corporates look to buy power for less than it costs to source it directly from the grid.
The firm also identified opportunities in social housing, where there is an undersupply of buildings but the sector is underpinned by government funding.
“Finding government-backed inflation-linked cashflows that can be sourced at a pick-up to index-linked gilts has become somewhat of a holy grail for inflation savvy investors,” Windsor said.
Three investment trust picks
Hargreaves Lansdown is instead betting on investment trusts, naming three trust picks in an analyst note today that could similarly help investors beat inflation and protect returns in the months ahead.
Its stock picks are the City of London Investment Trust (LSE:CTY), Merchants Trust plc (LSE:MRCH) and Murray International Trust plc (LSE:MYI), which have all delivered consistent dividends over consecutive years.
Over the past decade, the average investment company has returned 203% to shareholders, according to The Association of Investment Companies, which can “make a lot of sense” for investors.
Nick Britton, head of intermediary communications at the AIC, told Proactive: “Clearly there are ups and downs along the way, and investment companies won’t always beat inflation over short periods.
“But when you look at the long-term data, both investment companies and the broader stock market have comfortably kept pace with rising prices.”
The City of London Investment Trust (LSE:CTY), Merchants Trust and Murray International Trust have consistently increased dividends, increasing the amount they shell out to shareholders over 56 years, 40 years and 17 years respectively.
The trusts raised their dividends by 0.5%, 0.4% and 0.9% in June 2021, January 2022 and December 2021 respectively, in the first two cases using accumulated revenue reserves.
Joseph Hill, senior investment analyst at Hargreaves Lansdown, explained that investment trusts “have greater flexibility to ease some of the shocks of the stock market” by building revenue reserves.
“They can hold back up to 15% of their income when times are good, effectively creating a rainy day pot known as the ‘revenue reserve’,” Hill said.
“If the dividends paid by the trust’s investments fall one year, the manager can dip into the reserve to make up any shortfall.”
Investment bank Liberum reiterated in a research note today the Bank of England’s predictions that the UK will likely enter a recession in the fourth quarter and interest rates will hike higher.
The UK Consumer Prices Index rose 10.1% in the year through to July, above expectations that it would rise to 9.8% after hitting a previous record of 9.4% in July, driven largely by food price increases.
A peak in inflation is probably yet to come, with above-average inflation expected to last through to mid 2023, after which it is forecast to fall to 7.4%.
“This means investors will have to seriously rethink portfolio positioning,” said Windsor.
“In particular, investors should look for assets that can provide reliable inflation-linked cashflows over the long term—the ultimate safe haven in an inflationary environment.”