Markets have been busy with concerns about rising inflation for months, but stagflation is also a risk they need to be factoring in.
Although inflation is running ahead of central bank’s targets and well ahead of what markets have seen in the past, this is combined with unemployment higher than pre-pandemic - despite government efforts to preserve jobs during lockdown via various furlough schemes.
Both these factors could combine to create stagflation, a period where prices and unemployment rise but economic growth stagnates.
With this in mind, Trustnet asked several fund pickers what could help portfolios weather a bout of stagflation.
Ruffer Investment Company
First is Ruffer Investment Company, which Charles Stanley Direct pension and investment analyst Rob Morgan called a “one stop shop” for short-duration and inflation-linked assets, both ideal for hedging against stagflation.
Managers Hamish Baillie and Duncan MacInnes combine conventional asset classes – global equities, bonds, currencies and gold – with the use of derivatives strategies that provide protection to market downturns.
“The overall aim to protect as well as grow,” Morgan said. “They are currently wary of inflation so have this risk firmly in mind.”
Baillie and MacInnes recently said they were “sceptical” of the central bankers’ view that inflation would be transitory for several reasons. According to them, the recovering wage growth, “eye watering” government spending and fractured supply chains are just a few headwinds to achieving the pre-pandemic economy.
“However we are not bullet-headed,” they said, having allocated their portfolio to deal with the “bumpy moments” when their inflation stance is challenged.
Over 10 years Ruffer Investment Company made 59.3%, underperforming the IT Flexible sector's 64.3%.
Performance of fund vs sector over 10 years
Source: FE Analytics
Holding an FE fundinfo Crown Rating of five, the trust has ongoing charges of 1.08%, is tranding on a 3.2% premium and has a 0.7% dividend yield.
Personal Assets Trust
Another all-rounder is Personal Assets Trust.
Although it has had a “quite pedestrian” performance in rising equity markets, Morgan added it has a strong track record during weak markets.
“It therefore might be worth considering as a defensive holding at the core of a portfolio and I would expect it to fare relatively well with in a stagflation-type scenario,” he said.
FE fundinfo Alpha Manager Sebastian Lyon’s primary investment principle is ‘winning by not losing’, making the highest returns possible while avoiding any level of risk significantly higher than the FTSE All Share index.
A stagflation environment would best be suited to index-linked bonds or infrastructure, according to AJ Bell analyst Laith Khalaf. But these assets are currently trading on high prices and have some downside risk if inflation doesn’t materialise.
Therefore the Personal Assets combination of index linked bonds, gold and equities could be an ideal combination, he said.
Making a total return of 72.3% over 10 years, the trust beat the IT Flexible sector but underperformed its FTSE All Share benchmark, 95.7%.
Performance of fund vs sector and benchmark over 10 years
Source: FE Analytics
The £1.6bn trust has an FE fundinfo Crown rating of five, a 1% premium and a 1.1% dividend yield. It has ongoing charges of 0.73%.
LF Lindsell Train UK Equity
Another well-known fund to consider is FE fundinfo Alpha Manager Nick Train’s £6.5bn LF Lindsell Train UK Equity fund.
Companies which can weather stagflation are not dependent on the wider economic growth but have the power to generate its own growth, leading Adrian Lowcock, independent fund commentator, to highlight LF Lindsell Train UK Equity.
The fund is invested in quality-growth companies with in-demand products and are not too economically sensitive.
Train’s high conviction, buy-and-hold approach is used on all his equity portfolios. The style is good for stagflation because it leads to the above types of companies, Fairview Consulting directo rBen Yearsley said.
This has seen the fund outperform both the IA UK All Companies sector (113.9%) and its FTSE All Share benchmark over 10 years, returning 242.7%. - the ninth best return in the sector.
Holding an FE fundinfo Crown Rating of five, LF Lindsell Train UK Equity has an ongoing charges figure (OCF) of 0.65%.
Polar Capital Global Technology
One way to play stagflation is rather than hedging against it is to invest in companies that will benefit from the changes it causes.
Yearsley said companies will be looking to cut costs and streamline, creating more reliance on tech. Polar Capital Global Technology is one option for this.
The £3.3bn fund invests in major technology trends, exploiting international valuation anomalies and sector volatility.
The fund has outperformed the IA Technology & Communications sector over 10 years, 651% versus 445%.
Polar Capital Global Technology has an OCF of 0.82%.
Herald Worldwide Technology
Herald Worldwide Technology is Yearsley’s second tech pick.
The fund invests in many well-known tech names, as Microsoft, Apple, Alphabet and Amazon making up the top four holdings.
Managed by Katie Potts, it mainly invests in the UK and North America but takes a global approach.
Over 10 years Herald Worldwide Technology made 444% just underperforming the IA Technology & Communications sector.
It has an OCF of 1.25%.
Baillie Gifford Global Discovery
Another tech approach is the £2.1bn Baillie Gifford Global Discovery fund.
This is an option for investors looking outside of the large and mega-cap names and the stretched valuations.
Running a multi-cap approach with a bias to small-caps, Baillie Gifford Global Discovery is ideal for this, according to Lowcock.
FE fundinfo Alpha Manager Douglas Brodie, Luke Ward and Svetlana Viteva apply the fund house’s long-term investment in ‘exceptional’ growth companies approach, a style which saw them rocket to the top of 2020 performance tables.
Performance of fund vs sector over 10 years
Source: FE Analytics
Holding an FE fundinfo Crown rating of five it has an OCF of 0.76%.
Capital Gearing Trust
Penultimately is Capital Gearing Trust, which aims to deliver returns in excess of inflation long term. It does this with a high allocation to inflation-linked bonds, gold and ‘safe haven’ assets, which are well suited to stagflation markets, according to Dzmitry Lipski, head of funds research at interactive investor.
Managers Peter Spiller, Alastair Laing and Chris Clothier are currently forecasting for higher inflation and the trust’s highest allocation is index-linked government bonds at 30%.
“We view this trust as a good fit as a core holding due to its defensive stance and high levels of diversification,” Lipski said.
The fund outperformed the IT Flexible sector over 10 years, returning 73.59%.
Performance of fund vs sector over 10 years
Source: FE Analytics
With an FE fundinfo Crown Rating of five, Capital Gearing Trust has an OCF of 0.58%.
WisdomTree Enhanced Commodity ETF
The final pick is WisdomTree Enhanced Commodity ETF.
Offering investors a “broad and diversified commodity exposure,” Lipski said, it invests in industrial and precious metals, energy and agriculture. This makes the fund “well positioned” to benefit from the current market climate, Lipski added, as investors traditionally turn to commodities as another form of inflation protection.
Since launch in 2016 the ETF made 35.7%, underperforming the Gbl ETF Commodity & Energy sector.
It has an OCF of 0.7%.