SPECIAL REPORT REAL ASSETS AS INFLATION HEDGE
“
In emerging
markets, the inflation
basket is more to do
with food prices and
energy prices so we
could well be heading
into a situation where
there is asset price
inflation in certain
parts of the world,
yet we still may
not see inflation
measures in the UK
or US being used
that much
”
Frances Hudson, global
thematic strategist, Standard
Life Investments
Commodity & natural resource funds by Morningstar rating
M’star Fund Curr 1 year 3-year 3-year 3-year 3-year 3-year Launch Domicile
Rating size (£m) chg (%) chg (%) Sharpe Sortino Alpha Beta date
First State Glbl Resources III ★★★★ 123.75 $ 60.69 13.47 0.14 0.24 3.77 1.34 7 Nov ’06 Ireland
First State Global Resources A ★★★★ 575.17 £ 55.03 12.56 0.11 0.21 2.94 1.33 27 Oct ’03 UK
First State Global Resource ★★★ 316.24 S$ 54.20 12.01 0.09 0.20 2.40 1.32 5 Sep ’05 Singapore
BGF World Mining A2 € ★★★ 8,132.57 € 77.60 9.54 0.01 0.17 1.63 1.51 24 Mar ’97 Lux
T. Rowe Price Glbl Natrl Res Eq I ★★★★ 90.14 $ 30.16 8.22 -0.03 0.08 -1.87 1.13 15 Sep ’06 Lux
Martin Currie GF Glbl Resources ★★★★ 67.61 $ 28.95 8.20 -0.03 0.06 -2.28 0.98 13 Oct ’03 Lux
JPMorgan Natural Resources A Acc ★★★ 1,877.25 £ 79.40 8.11 -0.02 0.13 0.06 1.41 1 Jun ’65 UK
Parvest Global Resources C ★★★★ 82.06 $ 26.71 7.59 -0.06 0.03 -3.23 1.01 26 Sep ’00 Lux
Natural Resources Inst ★★★ 1,681.40 $ 83.72 7.31 -0.04 0.14 0.24 1.49 17 Sep ’07 Ireland
SGAM Fund Eqs Glbl Resources A ★★★ 24.93 $ 27.30 6.43 -0.08 0.08 -2.03 1.33 20 Dec ’06 Lux
JPM Glbl Natural Res A (acc)-€ ★★ 1,594.90 € 78.52 5.99 -0.08 0.09 -1.64 1.45 21 Dec ’04 Lux
Baring Global Resources ★★ 1,824.57 $ 37.16 1.63 -0.22 -0.05 -7.34 1.32 12 Dec ’94 Ireland
Oceanic CF Australian Natrl Res £ ★ 24.61 £ 115.49 -0.50 -0.23 0.00 -6.25 1.62 25 Jul ’05 UK
Source: Morningstar
to consumer prices.
“Although it is likely to
remain high over the next
few months, inflation is
more likely than not to fall
back to the target in the
second half of this year, as
the short-run factors wane
and the influence of spare
capacity builds.”
l The flood of money
The Chancellor may be
more bullish than most that
inflation will settle back to
its 2% target level sooner
rather than later, at least in
the medium term, but
investors are still influenced
by those who think
printing money must inherently
lead to inflation.
There are also the more
politically-minded who
suggest that inflation will
also be one way that the
UK’s huge debt can be
reduced, although this calls
for policies that somehow
micro-manage inflation and
introducing just a little bit
of inflation is nigh on
impossible.
What is still unknown is
the exact impact of the
flood of money entering
the global economy as
nobody quite knows exactly
where this money is.
Gwyther is another who
does not see a problem
with inflation just yet, nor
does he see a direct link
between money being
printed and inflation rising.
“The reason I do not think
this is necessarily the case,
at least in the shorter term
over 12 months or a couple
of years, is because the
money that has been printed
so far has not found its
way into our back pocket,”
he says. “In other words the
money that has been printed
so far has been used to
shift the debt burden
around between the public
and private sector and it
has so far been kept within
the financial institutions.”
l Inflating away debt
For UK investors, the consensus
is that inflation is
not going to be a problem
until at least the end of
2010 when some early
indicators may start to
twitch upwards. More realistically
2011 may start to
show inflation push
through the 2% barrier and
beyond, though this
depends on no further
unforeseen external factors
coming into play.
The micro-management
of inflation, with the government
trying to inflate
away its debt, may well be
one such factor given public
sector debt stands at a
mammoth £848.5bn (60%
of GDP) with the government’s
annual borrowing
expected to add a further
£178bn (12.6% of GDP) by
the end of this tax year.
Looking to politicians to
steer the correct course is
dangerous enough during
the best of times and with a
general election scheduled
for 3 June at the latest, the
current opinion polls are
opening up the possibility
of a hung parliament, which
is the worst possible result
for markets.
“Inflation is a legitimate
concern especially with the
politics of it,” says David
Wise, property investment
director at Aegon Asset
Management, adding: “You
imagine the necessary tightening
up will probably
come too late because of
the political pressure to
keep things loose with the
election coming up in what
will probably be an unpleasant
environment. There is a
high likelihood that inflation
will come back at some
point and QE is in many
ways creating those
conditions.
“The biggest spooks for
the markets will probably
come if there is a hung parliament.
What markets want
is probably a new government,
or failing that the
existing government reelected,
and the last thing
they want is a hung
parliament.”
l Fear of the unknown
There are a couple of
investment adages to
remember here. One is that
within a client’s portfolio
investors can only seek to
control what they know
about and whether or not
there is going to be a hung
parliament is, at the
moment, a definite
unknown.
The other is that investment
is all about anticipating
things before they
happen and, in the realms
of what may or not happen,
rising inflation is a matter
of 12-plus or so months
away, so what can investors
do today, for inflation
tomorrow?
That depends on the
type of inflation.
Frances Hudson, global
thematic strategist at
Standard Life Investments,
22 PORTFOLIO ADVISER [www.portfolio-adviser.com] MARCH 2010
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