Are there any trusts which are 'inflation proof'?

23 June 2021

Question by Dorit

Are there any trusts which are 'inflation proof'?

Answered by Boring Money

Dear Dorit,

I understand that in the current environment the press has been talking a lot about the risks of inflation. The threat of inflation can be mitigated through diversification of the portfolio into building blocks that can provide short and long-term inflation protection. When constructing portfolios, investors need to ensure that they are building in robustness against a wide range of economic scenarios, from recession to high growth and from deflation to high levels of inflation.

The goal for you is to protect the purchasing power within your time horizon, which ideally should be long-term (10 year+). While no perfect inflation hedges exist in today’s environment, global equities and global commercial property (accessed through real estate investment trusts (REITs)) appear to deliver strong inflation protected returns over the medium terms (10 years) and upwards.

Owning index linked gilts to maturity would result in material purchasing power losses over all maturities. Owning commodities like gold add more volatility to the portfolio and provide a short term hedge but are a poor store of purchasing power over the long-term. So as a long-term investor you would require you to be right when getting in and out of commodities. Outguessing markets is incredibly difficult and usually down to luck rather than skill.

In conclusion, I would suggest to invest more in equities and some in global commercial property. If you need to hold defensive assets, global short dated bonds are an expensive insurance against markets falls but may be worth it if you want to hedge the volatility in your portfolio. In practice, choose a global equities index fund, a global property index fund and if you require a global short-term bond index fund.

Answered by

Boring Money