Investors are caught between whether inflation will sharply rise or remain subdued. The unknown factor has led to some volatility in the S&P/ASX 200 Index (ASX: XJO) over recent months.
While central banks point to any high inflation environment being transitory, not everyone believes that to be the case. As a result, there are already highly regarded fund managers adjusting for inflationary pressures.
So, what are some of the experts doing to combat a potential inflation headwind?
Magellan not one to be complacent
Yesterday, Magellan Financial Group Ltd (ASX: MFG) released its third annual edition of InReview magazine. Within the publication, Chief Investment Officer Hamish Douglass discussed the risk of inflation on global equities.
Douglass explained that while the fund tends to agree with central banks, there remains a meaningful risk. Commenting on the matter Mr Douglass said:
Even if you believe that inflationary pressures are more likely to be temporary, the most important question to ask is what happens if inflation pressures are not temporary. If central banks were forced to tighten monetary policy by reducing, or ending, asset purchases and increasing interest rates, we could witness a major correction in equity and other asset markets.
Consequently, the fund has taken action to make the Global Equity portfolio more resilient to such inflation woes.
According to the Magellan Global Equities Fund annual review, the portfolio has been constructed to consider the near-term risk of inflation. For example, the fund is comprised of 15% consumer staples (Nestle, PepsiCo, Procter & Gamble); 11% regulated US utilities and communications infrastructure (Crown Castle International, Eversource Energy, Xcel Energy); and 7% franchise-model restaurants (McDonald's and Yum! Brands).
Disciplined value approach to fighting inflation
Another fund manager remaining vigilant of inflation risks is Bell Asset Management. In a release on Monday, Chief Investment Officer Ned Bell said:
Not having exposure to the extreme growth end of the market, because of our valuation discipline, has meant a slight drag on performance. However, going into an inflationary environment where very expensive stocks get beaten up will mean we'll go from a headwind to a tailwind.
This was in relation to the fund's bullish view towards a recovery in small and mid (SMID) market capitalisation stocks. Bell Asset Management takes a fundamental bottom-up approach for its Bell Global Emerging Companies Fund. Based on its June monthly report, the fund's top 5 holdings included Rightmove plc, CGI Inc, Ritchie Bros Auct, and Euronext NV.
