Making money from your savings has rarely been so tough. Inflation has peaked at a 40-year high of 9.1pc while the best cash savings rate stands at just 1.55pc. There are few ways to safely preserve your wealth, let alone grow it.
Investing remains the only way for savers to keep their money in line with inflation – or even beat it. While the stock market is risky and you should be prepared for the possibility that you will lose money in the short term, it also offers plenty of opportunities.
Surging commodity prices have been the driving force behind Europe’s rampant inflation. The Russian invasion of Ukraine has sent oil and precious metal prices into a frenzy, pushing up energy bills across the continent.
While the volatile commodity market may be hurting your household budget, Darius McDermott of FundCalibre, a fund research firm, said it represented an investment opportunity. He highlighted the £1.3bn BlackRock World Mining investment trust.
“The trust is benefiting from the supply and demand issues for metals,” he said. The trust, which invests in the likes of the copper miner Rio Tinto and the coal miner Glencore."
Real estate investment trusts
Cautious investors may prefer more defensive investments such as investment trusts that own real estate. These funds are particularly attractive when their rental income is linked to inflation.
Analysts at the broker Numis said they favoured Supermarket Income Reit and LXi Reit for this reason. Colette Ord from the broker said: “It should help the funds deliver healthy rental growth in the current inflationary environment. Supermarket Income Reit has 85pc of its current rent roll linked to inflation.”
Rob Burgeman of the wealth manager Brewin Dolphin said investors should also consider “real” assets in the infrastructure sector, as the essential nature of assets such as bridges and roads meant they could sustain their value.
“The 3i Infrastructure fund consists of a broad range of assets in Europe and Asia,” he said.
Investors may also turn to index-linked bonds issued by the Government, also called “gilts”. They sound simple at first: the income they pay rises alongside inflation, as does their maturity value. But they way they behave is more complicated. The Telegraph's Questor stock-picking column last year asked Hamish Baillie of Ruffer, a fund manager that runs several portfolios designed to beat inflation, to explain:
“What drives the price of these ‘linkers’ is the ‘real’ interest rate,” he said. “Real interest rates are interest rates relative to inflation – if, for example, Bank Rate is 3pc but inflation is 1pc, the real interest rate is 2pc. Now of course we are in the opposite position: inflation is higher than interest rates.”
But it’s not a negative real interest rate alone that constitutes a favourable environment for index-linked gilts. Instead, said Baillie, “you want real interest rates to be falling”.
This is another way to say you want inflation to rise faster than interest rates. This is precisely what we can expect if inflation does take off: the Bank of England will be reluctant to do what it normally does to counter inflation – raise interest rates – because indebted consumers, businesses and the Government itself can bear the burden of their borrowings only if interest rates stay low.
Which index-linked gilts to buy? Here's more from Questor:
“Short-dated” ones close to maturity offer little by way of returns because inflation cannot affect their value much either way in just a year or two. Longer-dated gilts offer the greatest sensitivity to inflation but the very longest dated are more volatile so we will plump for the middle ground: a linker that matures in 2036.
Linkers are available from brokers such as Hargreaves Lansdown or directly from the Government’s Debt Management Office. Even outside an Isa or Sipp, capital gains are tax free, although income is taxable.
Investors can also get access to index-linked bonds through funds. Mr Burgeman highlighted the Capital Gearing Trust. “It is managed by City veteran Peter Spiller and offers exposure to a range of assets including bonds, infrastructure and property, private equity and debt,” he said.
The yellow metal is traditionally viewed as a safe haven during periods of high inflation or market volatility. It enjoyed a strong rally earlier this year, climbing by as much as 13pc to $2,039 (£1,634), but its recent fall has erased its 2022 gains.
Popular wealth preservation investment trusts such as Ruffer Investment Company have topped up their positions in gold. The metal now makes up a 10th of the portfolio.
Gavin Trodd of Numis said Ruffer was a reliable pick when markets were volatile or falling. “During the global financial crisis the value of its net assets rose by 26pc in 2008, against a 30pc fall in the FTSE All-Share index. We believe that the fund can be regarded as an attractive portfolio diversifier.”