Inflation offers no respite: Fund tips to beat the cost of living

15th October 2013

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UK inflation continues to sting and given it is showing no signs of receding millions of Britons are continuing to see their spending power and savings eroded – we look at ways to beat it, writes Philip Scott.

Inflation figures released today show that as measured by the Consumer Prices Index (CPI) the cost of living was stuck at 2.7% during September.

To beat inflation, a basic rate taxpayer at 20% needs to find a savings account paying 3.38% per annum, while a higher rate taxpayer at 40% needs to find an account paying at least 4.50%.

Such is the corrosive impact of inflation on savings that £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,839 today according to Moneyfacts.

READ MORE: UK inflation prospects and further issues

Given the average no-notice savings account only pays a puny 0.66% interest, savers have no hope of achieving the 3.38% needed just to counter the effects of inflation and pay the taxman’s share.  The only option is to go for a fixed rate ISA account but of the few inflation-beaters that are available, they typically have five-year lock-ins.

How to beat inflation

With interest rates now languishing at a historic low of 0.5 per cent for more than four years, millions of Britons have been looking to the stock market and investing in a bid to get their money working harder for them.

With investing of course, comes risk, and you may not get back what you originally put in but with the UK’s FTSE 100 up by around 13% in the past 12 months, the attraction is obvious.

According to the UK fund management trade body, the Investment Management Association (IMA), sales of investment portfolios have enjoyed record highs in 2013 and presently there is more than £7320n invested in funds.

During August alone, UK investors ploughed more than £1bn into funds that invest in shares and of that amount some £225m was invested into so called UK Equity Income funds, which aim to provide investors not just capital growth but an inflation beating income too by investing in dividend paying firms i.e. companies that share their profits with investors.

And right now it is forecast that corporations listed on the FTSE 100 and FTSE 250 are set to declare a total of £89.1bn in dividends for the financial year ending next March.

Presently the average yield, or income from Equity income funds is well ahead of inflation at 3.71% and the typical fund has delivered a total return to investors of 35% over the past five years. We look at three of the best.

UK Equity Income fund tips

Adrian Lowcock, senior investment manager at Hargreaves Lansdown says: “The best equity income managers seek to protect the capital whilst looking for companies which are able to not only provide a dividend but also are likely to grow that income as well.”

One of the funds that Lowcock backs is JO Hambro UK Equity Income, which has a historic yield of 3.94%. In the last three years it has achieved a 51% return to its investors.

Rob Morgan, pension and investments analyst at fund broker Charles Stanley Direct cites Threadneedle UK Equity Alpha Income as among his top picks. With investments in firms such as BAE Systems and Aviva, the fund carries a yield of 4.3% and has achieved a considerable 55% return in the past three years.

Morgan says: “The fund is managed by Leigh Harrison and Richard Colwell, and I believe it is often overlooked compared to more illustrious rivals – despite quietly achieving some impressive returns. Being relatively small the fund maintains an edge. It has the flexibility to invest more heavily in small and medium-sized companies where the managers can often find some interesting ideas.”

Artemis Income is another of Lowcock’s and Morgan’s top rated funds. The portfolio pays a generous dividend, presently 3.8% a year and over the past three years it is up 40%. The long term performance of the portfolio has been very strong too as Hargreaves Lansdown’s research notes that anyone who invested when Adrian Frost, the fund’s manager took charge in 2002 has seen their investment almost triple in value where £10,000 invested would now be worth almost £27,000 with income reinvested.

For his part Aviva Investors’ head of multi-asset retail funds Peter Fitzgerald says the Artemis portfolio is the only UK Equity Income fund he invests in, he adds: “We are long term investors in this fund and hold the fund managers in high regard.”

Commercial Property funds

Commercial property funds are making a comeback, and while experts are not expecting massive investment growth, these funds are providing a steady income. Investing in commercial property allows investors the opportunity to spread their cash over a wide variety of properties, such as offices and retail parks, and the rents paid can provide a stable income.

Patrick Connolly, head of communications at financial adviser firm Chase de Vere rates Henderson UK Property and the M&G Property Portfolio. The Henderson fund which has investments in areas such as retail parks and hospitals, carries an estimated yield of 4.4%, way ahead of inflation while the M&G fund has a lower estimated yield of 2.92%.

…see more commercial property fund tips here

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