UK Edition
Are we in the “phoney war” phase in the fight against rises in the cost of living? The official measure of inflation slipped back by a whisker last month but few think the danger has passed.
Instead, the numerous problems to have come to light in global supply chains as the economy reopens suggest that many more price rises are in store. Hence we will hurry this week to complete our anti-inflation Wealth Preserver portfolio and will skip our IHT Portfolio, a less urgent priority, this time.
After last week’s addition of four commodities we have just 15pc of the portfolio left to deploy.
The first 5pc is quickly dealt with: we will leave it in cash. Cash? Surely that’s about the worst protection against inflation, you may say. Alongside (non-index-linked) bonds it is indeed. But this portfolio is also designed to protect us in the event of deflation – a prospect that, while it may seem distant now, is real enough to require us to arm ourselves against it a little.
Once output and distribution have been stretched to meet the current surge in demand, the world may find itself with too much productive capacity and too few people willing to spend, and prices could conceivably start to fall.
For the final 10pc we seek assets that we expect to perform in a way that is not tied to what other investments do – “uncorrelated” assets in City argot.
One risk with a wealth preservation portfolio is that, in a panic, all sorts of seemingly diverse assets get sold together as investors simply seek cash at all costs. It can be hard to predict what those who are panicking will do: will they sell gold, for example, as another source of cash, or buy it on the strength of its “safe haven” status? We have some gold in the portfolio but will not assume that it can never be sold off in a bout of market turmoil.
For ease of investment we will gain our exposure to our “uncorrelated” assets via investment trusts but will acknowledge that this itself exposes us to some of that “panic” risk: as liquid vehicles we could expect their discounts to widen as savers sought cash.
However, we would always advise investors to ride out any such storm and would pin our hopes on the underlying investments, which we will choose for their robust and uncorrelated nature. We will put 2.5pc of the portfolio into each; all have been tipped by Questor in the past.
First is the Honeycomb Investment Trust, recommended in September last year. It lends money to other lenders but does so directly, so it can carry out the due diligence needed to make the return of its money more likely than not.*
So far it has done an excellent job: in the six months to the end of June, a period that included lockdowns, its “expected credit loss” provision was £500,000, compared with assets of £638m.
The trust has paid a 20p-a-quarter dividend since September 2017 and yields 8.5pc. The value of its assets is not connected with the ups and downs of the stock market, although its own share price is likely to be to some extent.
We could say the same of Hipgnosis Songs Fund, which owns the copyright to a large list of popular songs. We first tipped the trust in January 2019 and earlier this month its management company announced a tie-up with Blackstone, the private equity group, which should improve its access to new deals. The fund aims to capitalise on the growing popularity of music streaming but also seeks to make the most of other opportunities, such as using its songs in adverts. It yields 4.3pc.
ICG Enterprise’s assets differ from listed stocks in two respects: first, they are unquoted; second, some of its assets are loans it makes to unlisted firms rather than ownership stakes in them. This again offers partial insulation from stock market volatility. The investments are managed by a large and experienced team and performance has been impressive since our first tip in April 2017.
Worldwide Healthcare is detached not so much from short-term swings in share prices as from booms and busts in the world economy. Spending on health is certain to grow in the coming decades and this portfolio has a consistent record of double-digit annual rises in value. It is also managed by one of the world’s best-resourced specialist healthcare investment firms, OrbiMed.
Questor says: buy
Tickers: HONY, SONG, ICGT, WWH
Share prices at close: 945p, 122p, £11.44, £35.95
*Amended from the version originally published, which said the trust lent directly to businesses
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