CERTAIN INVESTORS CAN BENEFIT FROM INFLATION…
We have heard the word ‘inflation’ and often frown as we hear it. However, when it comes to assigning a numerical value as to how it really impacts our pockets- it can become a tricky task. The impact of inflation is different from person to person. To us as consumers, inflation can impact our spending. However, inflation is not awful altogether. Certain investors can actually benefit from inflation depending on what assets they are holding inside their portfolio.
Who benefits from inflation?
For us as the consumer, ‘inflation’ usually means that we need to stretch our already static salaries even further. However, for investors contributing toward retirement portfolios, inflation can boost returns. Why is this?…
If investors are holding assets in markets affected positively from inflation, they can actually enjoy a bit of a returns boost. For example, those invested in energy companies, may experience a rise in their stock prices if energy prices are rising. If companies can charge more for their products as a result of a surge in demand for their goods, this can be a positive. In other words, inflation can provide businesses with pricing power and increase their profit margins. If profit margins are rising, it means the prices that companies charge for their products are increasing at a faster rate than increases in production costs. That said, not all companies will be able to do this.
While some assets can benefit from inflation, for others it can be particularly harmful. An example of this is fixed income investments, such as bonds. They aim to produce a stable income in the form of interest, or coupon, payments. As these payments are fixed, if inflation rises, their purchasing power drops.
One of the most popular options for income-seeking investors looking for inflation-beating returns is equity income funds. These funds pool your money inside a wide range of companies which pay an income in the form of dividends, or a slice of company profits.
Investments that are good for beating inflation
The blueprint to making money, long-term, in an inflationary environment, is to hold investments that have been historically viewed as hedges or protection-against inflation. These investments include real estate, commodities, or certain types of stocks and bonds. Investing in one of these assets can combat inflation, but investing in only one asset class can hold a risk of its own. This risk is known as: the lack of diversification.
So, how do we at Fairtree Invest simultaneously, combat inflation, manage diversification and generate above-inflation returns?…
Let us take a look into two of our funds as an illustration, the Fairtree World Wide Multi-Strategy Flexible Fund and the Fairtree Flexible Balanced Fund. Here, we will examine the latest underlying asset classes that we are invested in these two funds. Notice how these two funds are made up, we hold a blend of assets including real estate, commodities, a variety of shares(equity) and bonds. These growth assets are spread across local and global markets.
- FAIRTREE WORLD WIDE MULTI-STRATEGY FLEXIBLE PRESCIENT FUND
- FAIRTREE FLEXIBLE BALANCED PRESCIENT FUND
These solutions are designed to combat and capitalize on different economic conditions. These solutions blend assets together to comfortably outperform inflation and hold asset diversity. There are many other funds and solutions available at Fairtree that share similar investment philosophies. Each are designed according to our client’s investment objectives throughout various life stages and risk appetites.
For more information on setting up your own investment portfolio please email, clientservices@fairtreeinvest.com.
Is inflation the same for everyone?
As individuals, we go through various life stages; these stages have different expenses. The type of expense or ‘basket of goods’ during that life stage, will determine the level of inflation we are exposed to at that point in our lives.
For example; Thandi Letsaba has her own car, is completing tertiary education, buys her own groceries and is renting an apartment. She will be exposed to different inflation than what Joe Black is. Joe stays with his parents, is not studying, but does buy his own groceries and drives his car to work each day. If we look at Bheki Xaba, he is a father to three and all his children are in primary school. Him and his wife both have cars, they own their home and are paying off the bond.
Inflation is not the same for each of them because they have different expense baskets, with varying inflation implications attached to each.
What is inflation?
Inflation is a rise in price, it can take place in almost any product or service. Whether it is a ‘need’ like housing, food, utilities or medical care- or a ‘want’ like cars, cosmetics and massages. There are two main types of inflation, Cost-push inflation and Demand-pull inflation.
Cost-push inflation is the price increase that comes from an increase in production costs like raw materials and salaries. Demand-pull inflation is when there is a spike in the demand for the good or service across the economy. This subsequently causes a price increase.
Inflation can eat at investment returns. For example, an investment that returns 3% in an environment of 3% inflation will effectively return 0% when adjusted for inflation. Investments would need to generate higher than the rate of inflation to increase real purchasing power. To have a deeper drive into inflation as a concept click here.
-Kheara Kroggel
