In May, Questor put together a five‑asset portfolio that was akin to a “light” version of our Wealth Preserver portfolio. Its aim was to offer a simpler route to inflation protection, albeit with more limited diversification benefits than our main portfolio.
Six months on, the mini portfolio has generated a total return of 3.7pc (on the basis that the amount invested was split equally across the five assets). Since the annual consumer prices index (CPI) measure of inflation has ranged between 9.1pc and 11.1pc over the same period, the portfolio has slightly lagged price rises over the past six months.
The only negative performer in the mini portfolio has been our holding in the iShares Physical Gold ETC (exchange‑traded commodity), which is priced in sterling. It has declined by 2pc as monetary policy tightening implemented by America’s Federal Reserve has increased the relative appeal of interest‑producing assets such as bonds. Somewhat paradoxically, a fall in the price of gold in US dollars was largely offset by a weakening of sterling that itself was prompted in part by rising US interest rates.
Although gold has thus far been unhelpful in maintaining the purchasing power of the mini portfolio, its defensive characteristics and long‑running status as a store of value mean it remains a worthwhile holding.
By contrast, our holding in the miner BHP generated a 15.7pc total return. It was buoyed by a dividend equivalent to 5.8pc of our investment received during the period.
Clearly, BHP’s near‑term share price performance is likely to be negatively affected by a slowing world economy, which could prompt heightened volatility. But its solid financial position, focus on commodities that are likely to be in high demand as the world shifts to net zero and a price‑to‑earnings ratio of 6 suggest that capital gains are likely to exceed inflation in the long run.
Our holding in British American Tobacco has proved less successful than expected: its share price fell by 3.1pc over the six‑month period. However, this was offset by two dividends received that made our total return 0.1pc.
The company’s half‑year results showed that reduced‑risk products such as heated tobacco continue to grow rapidly and are likely to become an increasingly important part of its business. Moreover, its pricing power, which derives from the relatively inelastic nature of demand for cigarettes, and defensive credentials make it well placed to generate improving returns during the current period of stagflation.
Greencoat UK Wind, the renewable energy generator, has also produced a modest positive total return. Its shares declined by 1.4pc but two dividends received since May, which amounted to 2.5pc of the purchase price, resulted in a 1.1pc total return.
Political risk remains heightened towards the renewable energy sector, as the Government’s sudden focus on fiscal discipline prompts new taxes, as discussed here yesterday.
In Questor’s view, the company’s aim to increase dividends at least in line with inflation and the stock’s 5pc yield compensate for the damage likely to be done by higher taxes over the medium term.
Our holding in Monks Investment Trust generated a 3.6pc total return, almost all of it from capital growth. This is welcome, if somewhat surprising in view of its focus on growth stocks during a period of rapidly rising interest rates and weak market sentiment.
In August, Monks agreed to merge with the Independent Investment Trust; the combined fund will continue to be run by Baillie Gifford. It currently trades at an 8pc discount to net asset value, which suggests it offers good value for money on a long‑term view.
Clearly, the mini Wealth Preserver portfolio has been in existence only for a short time. However, in Questor’s view it offers a useful introduction to assets that could help investors to maintain, or even grow, the value of their portfolio in real terms during the current period of high inflation.
Assessing when rapid price rises will ease is clearly a fool’s errand. However, it would be unsurprising for interest rate rises to have a noticeable impact on the rate of inflation once the oft‑overlooked time lags have passed.
Questor says: hold
Ticker: SGLN, BHP, BATS, UKW, MNKS
Share price at close: £28.22, £24.61, £33.27, 154.4p, 989.5p
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