Is Inflation Here to Stay?

Editor's View: Some investors have never experienced the effects of rising prices on their savings

Holly Black 2 July, 2021 | 10:05AM
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This week we held the 15th annual UK Morningstar Investment Conference. It’s not quite business as usual of course, and we weren’t able to welcome you in person, but hundreds of you joined us online for the event, which saw top fund managers including JPMorgan’s Clare Hart, M&G’s Jim Leaviss, Polar Capital’s Ben Rogoff, and BlackRock’s Roland Arnold, take to the virtual stage to give their thoughts on the most important trends in investing. If you didn’t manage to catch the sessions live, there’s still time to catch up on the Morningstar Investment Conference site and we'll have plenty of content for you too over the coming days.

Across two jam-packed days of diverse sessions, there were a few key themes that seemed to dominate discussions. Firstly, inflation and the need to take it seriously. There’s a whole generation of investors out there that has never experienced proper inflation – it’s around 10 years since UK inflation was above 5%. And that means they've never had to guard against the brutal effects that this can have on your savings. How high can inflation go, is the question on many an investor's mind at the moment, and is it here to stay?

ESG was unsurprisingly a key theme, and it’s interesting to see how much managers are taking matters of sustainability into account in their decisions these days, regardless of whether they have an explicit ESG mandate or not.

And life post-Covid was, of course, a much-discussed topic. The pandemic has shaken up our lives over the past 18 months and we’re not quite out of the woods yet. Fund managers now face the challenge of working out which Covid-19 trends are here to stay and which will soon be a distant memory. Will we return to offices, will the high street survive, and will international travel bounce back? These are important questions which are yet to play out.

We hope the conference left you with plenty of ideas as well as some food for thought – if there are any sessions you missed, be sure to catch up while you can. And hopefully we’ll see you in person next time around.

Small Can Be Beautiful

When it comes to investing, bigger is not always better – but there are definitely reasons to be cautious about very small funds.

When I’m delving into performance, I typically screen out funds below a certain size. There are valid reasons for this: smaller funds are often newer, and may have a less-established team and a shorter track record. There are issues of liquidity of course, and the very real danger that if a major investor sells out, you could get stuck in the fund. And there is volatility – in a smaller fund, the share price swings of individual holdings can have a real impact on overall performance; smaller funds tend to endure greater ups and downs.

But there are definitely some attractions in holding a smaller fund. First and foremost, that they can access exciting earlier-stage and micro-cap companies, which a mega-fund may be too big to invest in – making the right bets in these stocks can lead to serious gains. Nimbleness is another appeal, and smaller portfolios can often move more quickly to take advantage of a buying opportunity (or a selling one!).

When we think about diversification in investing, we often limit ourselves to asset classes, geographies or sectors. But a truly diversified portfolio also contains a mix of fund sizes – because just as a value and a growth fund will behave in different ways, so too will a behemoth and a minnow. Size matters in investing, and while big funds brings some benefits as well as some comforts, I think it’s important not to overlook the little guy – he could be the giant of tomorrow.

Who Will Triumph?

It’s not only Europe’s football players who are fighting it out for a victory at the moment, this week we’ve launched a just-for-fun investing league among the Morningstar editors. We’ve all been given an imaginary £10,000 to invest, to see who’s the resident Warren Buffett of the group.

I’ll stress again that our stock portfolios are absolutely not advice or recommendations – these are concentrated portfolios (incredibly concentrated in some cases), and a 10-stock limit means they are not well-diversified. We’re using this as a fun exercise to make some outlandish bets with imaginary cash, just to see what might be. So we hope you enjoy charting the progress of the editors over the coming months but, please, don’t try this at home.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk