Investors with an eye towards retirement need to be very mindful of the impact of inflation following a period of years in which it has not been a concern, according to David Coombs, multi-asset investor at Rathbones.
He says that in a world where inflation may linger at a higher level in the next decade than has been the case for the past decade, the only answer is for clients to have more exposure to equities.
He says: “The asset that looks best suited to protecting investors from persistently higher inflation is equities, particularly the companies that are growing structurally. Government bonds still don’t offer positive real yields, but they can be useful in portfolios as a diversifier for when equities are volatile.”
Structurally growing equities would tend to be those that are less cyclical than the more value-type equities that are often held in income portfolios.
Many of those stocks do perform well in a rising interest rate environment, but also are vulnerable if economic growth slows, whereas structural growth companies should be able to grow regardless of wider economic conditions.
Coombs says that with investors likely to spend a longer period in retirement than has been the case in the past, there is a greater need to own more of those growth equities than has been the case historically, alongside the more obvious income stocks.
Alex Funk, chief investment officer at Schroders Investment Solutions, says the sort of structural growth stocks that might be a hedge against inflation tend to be found in the US, while the more traditional income stocks are in the UK and European equity markets.
He says an investor’s view on inflation therefore has a significant impact on the proportion of the equity allocation placed into each part of the market.
Funk says the changes investors need to make right now are within asset classes, as while bonds do not look attractive now, he continues to believe they have a long-term future in portfolios and at points over the next decade will look attractive.
Volatility
Fahad Hassan, chief investment officer at Albemarle Street Partners, says he is sceptical that the changing global landscape ultimately alters the picture in terms of allocation to equities for a client in or near retirement.
He says the volatility of equities means it is always a challenge to increase the level of equity exposure in portfolios, as extreme market movements, even if short-term in nature, are not helpful for clients in retirement.
Hassan says: “Multi-asset income portfolios generally contain corporate and government debt and a variety of equity exposures. Broad equity indices however have high levels of correlation and are twice as volatile as government bonds over the long term. During market sell-offs equity indices can fall by 50 per cent.
