It’s a frustrating time to be a saver. Inflation hit its highest level in three decades, while banks have been very slow to pass on the three interest rate hikes since December.
As the deadline to invest this year’s Isa allocation approaches, how can you best protect your money from rising prices?
The answer is not cash Isas, which now generally pays less interest than regular savings accounts. With consumer prices up 6.2%, the stock market may be the best chance for inflation-beating returns. But where to invest and how?
Some are specifically aimed at beating the rate of inflation. The Trojan Fund, from Troy Asset Management, is recommended by Hargreaves Lansdown. It is based on four investment “pillars”: large, established companies that it believes can grow over the long term; government bonds; gold-related investments and cash.
Last year, it rose by 12%, with a charge of 0.86% that Damien Fahy, of the financial site Money to the Masses, considers “reasonable”.
Index funds, also known as index funds, track a broad market or market segment. AJ Bell’s Laith Khalaf says it’s a simple, inexpensive option that can give instant diversification. He recommends the Fidelity Index World Fund, which has an annual charge of 0.12%.
“There is no special inflation strategy, you just invest in the broad market and rely on rising stock prices to lift your returns above long-term inflation,” he said. “One of the risks of this approach is that currently about two-thirds of the global stock market is made up of US companies, so you’ll have a lot of eggs in a regional basket.”
It increased by 14.9% last year.
Commitment to slowing climate change and shifting to more sustainable energy systems have created opportunities, says Rob Morgan of wealth management firm Charles Stanley.
He highlights Schroders’ Global Energy Transition Fund, which aims to invest in 30 to 50 companies focused on transitioning to a low-carbon economy. Those involved in nuclear energy and fossil fuels are excluded. After increasing by 143% between 2020 and 2021, it is down 10.3% last year.
Morgan says: “They are specialized and can be quite volatile, so should only take up small positions in a larger portfolio, and are definitely worth holding for the long term.”
stay in the dark
Guinness leads the stout market and has historically raised prices based on the wages of manufacturing workers, giving owner Diageo a distinctive brand with loyal customers. Companies like this can be well positioned in an inflationary world, says Jason Hollands of Bestinvest, and he points out that funds investing in similar companies are resilient to changes in the economic environment.
The Liontrust UK Growth Fund is up 12.6% year-on-year, with a recurring charge of 0.84%. He owns 5% in Diageo and 6.6% in healthcare giant AstraZeneca. TB Evenlode Income Fund is up 9.04% year over year and has a recurring charge of 0.87%. He owns 8.2% in Diageo and 8.1% in consumer goods giant Unilever. Check out the fact sheet on the providers’ websites – it lists the biggest holdings.
Value investing involves choosing stocks that are believed to be trading below their book value.
Dzmitry Lipski, head of fund research at Interactive Investor, says value stocks have the ability to grow earnings above inflation and pay stable or rising dividends. Warren Buffet is considered the first investor in the field.
The Artemis SmartGARP global equity fund aims to invest in attractively valued companies, Lipski says, that trade “at a valuation below their intrinsic value.” It is up 9.48% over last year, with a charge of 0.89%.
Does it all shine?
Gold is often seen as the “safe haven” investment and therefore tends to thrive when the rest of the world falters.
Last year, its value increased by almost 17%, but it is volatile. Fahy highlights the Ninety One Global Gold Fund, which invests in the shares of companies involved in gold mining.
It is up 18.7% over the past year with a charge of 0.84%. “It’s different from actually investing in gold, and gold mining stocks can be even more volatile, especially if the price of gold goes down,” he says.
How much should I invest?
Although the Isa deadline is fast approaching, you don’t have to commit all your money to the stock market now. Sarah Coles of Hargreaves Lansdown says: “You can open Isa stock and shares on the platforms and then gradually inject cash into stock market investments when it suits you.
This has the potential benefit of avoiding losses in the event of a fall, explains Fahy. “Investors acquire more units/shares for their money as they go, perhaps using regular monthly installments equal to the downside, which increases their return when the markets end straighten up,” he said.
However, a Vanguard study showed that the lump sum investment beat the drip method over a 10-year period.
“The message is that you can’t predict the market, and if you’re investing for the long term, time in market is usually more important than when you enter,” says Fahy.
Know the fundamentals
There are four types of Isas – species; stocks and shares; innovative finance and lifespan.
Your Isa allowance of £20,000 can be split into one type or split. The limit for a lifetime Isa is £4,000 per year.
You don’t have to pay tax on interest earned or investment income
You must save or invest by April 5 each year. Unused allocation is not carried over.