As central banks struggle to curb runaway global inflation, investors and allocators have shifted portfolios to insulate against rising prices. Due to their inherent structure, closed-ended vehicles offer an elevated natural defence against the potentially return-eroding impact of inflation.
From accessing alternative credit to benefitting from inflation-busting real asset yields, three investment experts explain how investment trusts can support investors to thrive in an inflationary environment.
The Reit structure for fighting inflation
Vincent Ropers (pictured), co-portfolio manager of the £86.3m TB Wise Multi Asset Growth fund
“We allocate about 60-70% of our portfolios to investment trusts due to their unique qualities as investment vehicles for a range of asset classes.
“We think it is the only way for managers like us, who manage multi-asset strategies, to offer genuinely diversified portfolios to our clients due to the wide array of asset classes that you can find in investment trusts.
“Specifically, with the question of inflation, the great thing about investment trusts is access to illiquid assets, such as property, infrastructure, and renewables. We have positions and allocations to all of those areas that offer either a direct or indirect link to inflation. We have exposures in property, particularly in the specialised areas such as care homes, for example, as well as infrastructure, utilities and in the fixed income arena.
“We find investment trusts are able to access less plain vanilla strategies in the fight against inflation. As an example, we invest in property debt or infrastructure where loans issued by the managers are [at] floating rates, so have an intrinsic hedge against inflation. We also invest in asset-backed securities, where again we invest in floating rates, which move in line with central bank base rate movements. The final way we try to protect our portfolios from inflation is through commodities.
“There is a wide range of options available in investment trusts that are not necessarily available or even appropriate in an open-ended format.”
Achieving inflation-linked income
Ben Fry, head of housing at Gresham House and manager of Residential Secure Income
“We are focused on the two housing sectors that best offer direct inflation-linked income, while benefitting from huge demographic support. The first of these is independent retirement living for retirees without care needs, clearly a sector that’s growing massively as the population ages. The second is shared ownership which is a part-rent, part-buy affordable home ownership product for young families and key workers.
“Our trust is about delivering secure, long-term inflation-linked income. We invest in a pool of more than 3,200 affordable homes that offer inflation-linked rents. The portfolio is worth about £370m today. The current environment is very supportive. For example, 96% of our rental income is directly inflation linked, nearly all of which is RPI, which feeds through to our covered dividend.
“In the UK, in more than 90% of the country, the average family is no longer able to buy the average house in their area. We’re offering them a way out of that difficult situation through our shared ownership product.
“Our homes are energy efficient which helps us keep householders’ energy bills low, and then in our shared ownership portfolio our rents are subsidised because we receive government grants. We are generally saving people around 30% compared to renting the same home on the open market. Interestingly, this hasn’t yet impacted house prices. Except at the very top end of the market, there’s virtually no premium at all for homes being energy efficient, despite the opportunity to save perhaps £1,000-£2,000 a year as energy bills continue to rise.
“We expect these things to come through over time, particularly as people become a lot more familiar with their energy bills, as well as the increasing focus on being sustainable. It’s an area where the retail market is way behind the institutional market in offices and other commercial buildings, where there’s a huge focus on energy efficiency.”
Driving performance through dislocations
Simon Matthews, senior portfolio manager of Neuberger Berman Monthly Income
“Clearly the world has changed quite a bit in the past six months. We are in the camp of a slowdown, but we think a recession – certainly from a US perspective – is quite unlikely given the current strength of the US consumer.
“I would acknowledge that the Fed has certainly let things overheat, much more than would be advisable. Clearly, there’s going to be a lot of volatility through this period as rates hike as rapidly as they are.
“We have had a period where many company issuers have been able to rebuild their balance sheets post-Covid. In the near term, we’re not concerned from a positioning perspective and we have moved into sectors that are somewhat more defensive.
“We see significant value, for instance, in the telecom, cable TV or healthcare sectors right now, as we are seeing some dislocations there. From a geographical perspective, we see more value in the US versus here in Europe where I think the economic outlook is more challenged for reasons everyone is familiar with.
“The energy crisis is another area specific to our fund because, while we have a 7% exposure to the energy space, much of it is US-domiciled. These are companies which are midstream oil production assets. The backdrop for those assets has improved quite considerably in the backdrop of the very unfortunate events in Ukraine.
“Now is a time of caution. And we’re positioning in that way, where we could see some volatility in credit spreads but we think investors are getting paid – for example our portfolio is yielding 7%, driving a dividend yield of over 6%. We think it’s very attractive when compared to equities and some other alternative asset classes.”