Ten funds to help beat inflation

Inflation remains relatively subdued at present. However, many commentators believe that, sooner or later, it will start to rise again rapidly as a result of all the extra money that has been pumped into many of the world's economies through quantitative easing (QE) programmes.

Also, governments are likely to hold back from raising interest rates to curb inflation too soon, for fear of choking growth.

Inflation is the investor's worst enemy because no matter how careful you have been about building up your capital, rising prices will gradually erode its purchasing power. The only way to try to prevent this happening is to invest where the real value of your money is likely to be preserved.

To get the lowdown on a global fund that is aimed at producing "inflation-resistant capital growth", read:Fund focus - Fidelity Global Real Asset Securities.

The question then is: which funds are most likely to give you protection if there is a spike in inflation? David Thomson, chief investment officer at wealth managers VWM Wealth in Glasgow, points out: "The most obvious way to protect your money against inflation is to invest in index-linked bonds, the value of which will rise automatically in line with inflation. The fund we like for this purpose is the Standard Life Global Index Linked Bond fund because it provides both index linking and diversification as it is a global fund."

The fund invests primarily in government bonds, mainly in the US and the UK, so it is very defensive, although it can also hold index-linked corporate bonds. As it is invested globally there is an element of currency risk, but Thomson says the interaction of inflation rates and currency movements tends to be self-correcting and even out differences.

A similar fund is nominated by Ben Yearsley, head of investment research at Charles Stanley Direct. He suggests M&G UK Inflation Linked Corporate Bond fund. He explains: "The managers of this fund are looking to track the UK Consumer Prices Index over the medium to long term by investing mainly in corporate bond bonds, but also in government bonds and derivatives to give a blend."

Historically, equities have proved a good way of protecting capital from inflation. Dividends make up a large part of the returns from shares, therefore Paul Surguy, head of managed funds at Sanlam Private Investment, believes that equity income funds are one of the best means of keeping ahead of inflation. The type of companies these funds invest in tend to be well-established businesses with good cash flows. Managers believe they will be able to increase their prices in line with inflation in order to maintain their dividends.

Surguy suggests two UK equity income funds that are particularly likely to produce inflation-beating returns for investors are Artemis Income and JOHCM UK Equity Income. He says: "The managers of these funds are highly experienced. Adrian Frost and Adrian Gosden, managers of Artemis Income, focus on companies with strong free cash flows, while at JOHCM UK Equity Income, Clive Beagles and James Lowen look for undervalued companies."

Traditionally, when investors have been worried about inflation they have turned to gold, which could favour funds such as BlackRock Gold & General, but David Thomson is not so sure. He says: "In theory gold should be a good hedge against inflation, but the gold price has been all over the place recently so I don't feel it is a particularly attractive option at present."

Instead, he considers equity income funds a good choice for longer-term protection against inflation. He explains: "The investments that will do badly if there is a surge in inflation are conventional fixed-income securities, and investors who turn away from those securities are most likely to favour the blue-chip, higher-yielding shares that are traditionally held by equity income funds."

Invesco Perpetual Income and Invesco Perpetual High Income are funds which he believes would do well in this scenario. "They have very defensive portfolios so they would provide a relatively safe haven," he says. However, he also likes Newton Global Higher Income and M&G Global Dividend, as he feels they can cast their net more widely.

Yearsley's alternative recommendation is also a globally invested equity fund. However, his choice is a little more unusual. He explains: "My suggestion would be First State Global Listed Infrastructure fund. It is invested in the shares of infrastructure companies, so its performance will be influenced by stockmarkets, but the assets which these companies own, such as toll roads, ports and utility companies, often charge prices that are directly or indirectly linked to inflation." He believes this type of fund could even outperform an inflation-linked bond fund.