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Adviser Fund Index

The inflation report published recently by the Bank of England suggests that inflation is set to fall next year and within two years it is likely to fall below the target rate of 2 per cent.

In the meantime, how-ever, inflation is likely to rise and peak over the next few months at 5 per cent.

But what do these shifts in inflation projection mean for investors and do they have a bearing on the AFI panellists’ decisions?

Some panellists are seeking out inflation hedging strategies, especially for their more cautious portfolios. However, they say that once inflation starts to fall, it may be time to embrace more risk.

Hilary Coghill, chief investment officer at City Asset Management, says her asset allocation has already changed due to higher inflation. She has increasingly used structured products, gilts and fixed-rate bonds.

She says: “Recently, inflation has become much more important. We are increasingly going down the structured product route and we are opting for much higher cash weightings. We are also looking again at straightforward gilts.”

Coghill is also advising clients to choose fixed-rate bonds. “I am telling clients to take advantage of these rates,” she says. “It is about 7 per cent for a fixed one-year bond. Financial institutions are desperate to get more deposits on their balance sheets. I am telling clients, do that and come back in a year’s time.”

David Wynne, associate director of Bentley Jennison Financial Management and an AFI panellist, says inflation is one of the things he considers when determining risk within his portfolios. About eight months ago, he moved his client portfolios to a more defensive stance.

He says: “Inflation is part of the whole process. Oil price inflation and food infla- tion, this is going to have a definite impact. We do consider inflation but it is not the be all and end all. What you come back to is the Bank of England target and their ability to achieve that target.”

According to Wynne, the important thing to ask is, at what point will the economy start to grow again? and what will the catalyst for that growth be?

He says: “Once people start talking about inflation going down, we can think about the next growth phase. Part of our job is to get that call right.”

Mick Gilligan, director of fund research at Killik, says inflation is a prime consideration. However, in the med- ium term, he is more concerned about deflation.

On a three-month view, Gilligan says caution is pref-erable. He advises invest- ors to concentrate on lower-risk holdings such as high-quality corporate bonds, absolute return type funds and high-quality large-cap portfolios.

However, Gilligan says that once there is more evidence that central banks will start cutting rates, risk within portfolios should be increased.

He says: “Further on, if there are clear signs that deflation is on its way, everything turns 180 degrees. You want to embrace more risk, put a bit more in emerging markets, lower-quality bonds and more commodities.

“The key is you are with managers that are going to take this call for you.”

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