Dan Kemp: With the announcement that UK inflation has risen to 3%, investors are rightly concerned about the impact this will have on their portfolios. But we have to remember that we all suffer from recency bias. That is, we tend to be more concerned about the news around us and what's happened in the recent past.
When building portfolios, we can't just think about an inflationary scenario. We need to remember that the future is probabilistic and there's a range of possible outcomes. But for those who are living on a fixed income, inflation is a very important factor. And so, typically, when people are trying to invest with inflation in mind, they tend to think about real assets. These are investments with some in-built inflation protection, typically, property or shares. But we focus far more on real returns and that could be any asset that offers an attractive return once a reasonable estimate of inflation is taken into account.
We see very few opportunities for such returns at the moment. And so, we are being typically cautious as we approach portfolios. But if you are concerned about inflation, then remember that the businesses that tend to well are those that tend to have pricing power. And so, look for those that have high-quality assets where they can increase their prices to overcome the effects of inflation.
