Four Year High for Fund Sales as Investors Seek Protection from Inflation

The latest fund sales statistics from the Investment Association (IA) show fund sales hit a four-year high, with total net sales of £24bn in the first half of 2021; it is also apparent that fund investors are increasingly seeking to inflation-proof their portfolios – writes Christian Leeming.

Whilst investor confidence remains high, rising inflation is becoming an increasing concern; Chris Cummings, chief executive of the IA, says that this is a ‘clear sign of the strong economic recovery and growing investor confidence as we emerge from the pandemic.

‘If the pace of net sales continues at the same rate, we could be on track to match the record-breaking inflows of 2017.’

Global funds continued to prove popular, with £1.1bn invested in June; Mixed Investment 40-85% Shares and Volatility Managed were the second and third most-popular sectors, with sales of £910m and £363m respectively.

The IA’s recently launched Global Inflation Linked Bonds sector was the highest-selling bond sector in June, attracting £214m suggesting that investors are increasingly focusing on adding inflation protection to portfolios.

A total of £5.6bn is held in the sector and it was the fourth most-popular sector in June, followed by Europe Excluding UK.

Despite confirming that inflation is expected to climb to 4%, a level which is double the Bank of England’s target, last week it announced that interest rates would be kept at 0.1%.

The Bank believes that current inflationary pressures are temporary and that inflation will return to around 2% in two years; the Bank’s monetary policy committee (MPC) attributed the surge in fuel prices and imported goods to the impact of the pandemic as the economy recovers.

The Bank said in its latest monetary policy report that the post-pandemic recovery has ‘led to higher energy and goods prices, which in turn reflect rising commodity prices, transportation bottlenecks, constraints on production and strong global demand for goods.

‘As such, above-target inflation is expected to be transitory, as commodity prices stabilise, supply shortages ease and global demand rebalances.’

However, the increasing popularity of inflation-linked investments could indicate fears that inflation could remain high to help to erode huge government borrowing in response to the pandemic, forcing a rise in interest rates

Inflation is one of the biggest risks for long-term savers and investors as it slowly but surely erodes the real value of money over time; inflation has been negligible for the best part of a decade, and so inflation-proofing a portfolio may have become a forgotten skill for some.

Rising inflation can be bad news for certain parts of the equity market, particularly cyclical businesses that compete on price, such as retailers; therefore when seeking to build a portfolio to guard against inflation it makes sense to target shares in companies known as price-makers –  those that can influence the market price and enjoy pricing power.  

Rising inflation is a curse for bond holders as it erodes the purchasing power of the income that investors are paid; holders of long-dated bonds suffer the most.

Index-linked bond funds and short-duration bond funds are more resilient than others in the face of rising prices; investing in infrastructure, real estate and other physical assets such as gold, can also be effective ways to shield against inflation.