Funds for the inflation-wary investor

Date: Thursday, March 24, 2011
Author: Leonora Walters, Investors Chronicle

Investors are increasingly worried about inflation and are turning to emerging-market and commodity funds in order to offset its pernicious effects, according to the Association of Investment Companies (AIC).

The AIC, the trade organisation for investment trusts, said 19 per cent of respondents to its February survey cited inflation as their greatest concern - and that was before Tuesday's news that consumer price index (CPI) inflation leapt from 4 per cent in January to 4.4 per cent in February.

Rising prices and poor interest rates in banks mean 45 per cent of these investors plan to increase their stock-market exposure, and the sectors they are turning to are emerging markets and commodities.

Emerging markets

Some 24 per cent of investors expect emerging markets to outperform, up from 14 per cent in the autumn even though the main emerging markets have underperformed in that time. There is an increasing choice of investment trusts in this area - in addition to established global emerging markets vehicles such as Templeton Emerging Markets (a recent fund tip) and Advance Developing Markets, last year two emerging markets income vehicles came to market: Aberdeen Latin American Income and JPM Global Emerging Markets Income (another recent fund tip).

Commodities

An even greater number - 33 per cent versus 24 per cent in the autumn - expect commodities to outperform. You can buy BlackRock World Mining on a discount to net asset value (NAV) of around 13 per cent, while Baker Steel Resources (another IC fund tip) is on a discount of nearly 6 per cent.

The best performer over the longer term has been City Natural Resources High Yield Trust. It's heavily exposed to uranium, whose price has been hit by events in Japan, but which may yet recover. Uranium related investments accounted for 14 per cent of assets at the end of February.

Nevertheless, City Natural Resources High Yield's greatest sector allocation is gold and precious metals at 33 per cent, so could prove a very good inflation hedge. The trust trades at a discount of nearly 16 per cent to NAV.