It’s no surprise that, as inflation has been on the rise for several months and is due to hit 11% in October, investors are taking new measures to hedge their funds against soaring costs. A recent study by Citywire reveals that income funds have become a popular haven amid the growing cost of living, showing nearly a 10-year high in monthly inflows. So, as prices continue to climb, we take a deep dive into Citywire’s research and evaluate options for protecting your investment in an inflationary environment.

What are income funds?

Income funds generate a regular income from investments rather than waiting for market prices to rise. Income is achieved through investing in a stable, established company or asset, which produces earnings from its dividends.

During times of financial uncertainty, income funds can be a suitable investment option, which offers reliability over risk. As well as a regular revenue stream, the bonds within income funds are typically investment-grade, meaning that they have a respectable credit quality.

Income funds tend to vary between securities, such as government or corporate bonds, or stocks. Different types of income funds include:

·        Equity income funds

These income funds have proven popular this year among investors looking for a reliable source of income generated from their portfolios. Equity income funds mean that companies pay regular dividends on their stocks, which can present a suitable long-term solution to risk-averse investors during times of high inflation.

·        Bond funds

Bond funds typically involve either corporate or government bonds. Government bonds can present some safety in uncertain times for investors as they are issued and protected by official government bodies. However, they can also offer a low yield compared to other income funds, such as corporate, which tend to come with higher interest rates.

·        Money market funds

Rather than growing your savings over the long-term, money market funds are investments in short-term debt securities, such as banks, governments, or established companies. They then generate a small return for investors through interest. Money market funds are a relatively low-yield option but can be suitable for many investors looking for more control and certainty through a short-term investment type.

What are growth funds?

In contrast, growth (or accumulation) funds are long-term investments such as pensions or shares in large companies, which help your money grow over time to make a profit at a later date. Unlike income funds, growth funds have a much longer time horizon and rely on continued market monitoring, which doesn’t offer the reliable revenue that comes with income funds.

A key difference between income and growth funds is that growth funds automatically reinvest profits back into the fund, while income funds pay the income directly to investors.

How have income funds been performing in 2022?

Some of the key metrics captured by the Citywire study that income funds have marked this year are:

·        £1.8bn has been invested into UK-domiciled global equity income funds in the first half of 2022

·        This created the “longest period of consecutive monthly inflows” in 8 years

·        March 2022 saw over £625m in inflows, which is the highest since 2013

The below chart maps the growth of global equity income funds (GBP) over the last two years.

Year-on-year to June 2022, funds have grown by 5.5%, while the market index dropped by over 4%. As of July, both are almost aligned, with funds at 15.21% and the index at 15.87%. Over these two years, funds have consistently grown in line with the market index, resulting in a growth of over 10% since the last quarter of 2020.

More specifically, funds managed by Fidelity and Baillie Gifford experienced the largest inflows over others in the first half of 2022, as shown below:

Why have income funds become so popular?

The Citywire study reveals that “Income-paying funds have had their highest monthly inflows in almost 10 years”. A key contributor to this is soaring inflation, with the cost of goods and borrowing reaching a 40-year high. This had led to investors trying to reorganise their funds to match or outperform inflation, causing a rise in fixed income and stable returns.

As food, fuel, and mortgage costs continue to rise, investors are faced with the erosion of their returns, and as we anticipate the 11% inflation hit in October, it doesn’t stop there. The snowball effect of rising inflation means that “40% of mortgage rates are likely to go up in the next 12 months”, and so investors have been seeking a reliable revenue source with an inflation hedge. Citywire researcher Frank Talbot explains: “Equity income is an interesting space in that it’s the intersection between value, inflation protection, and non-ESG-friendly stocks, so it’s easy to see why investors have been consistently upping their allocations to this area.”

Diversification is another element attracting investors to income funds as it offers varied industry exposure. Particularly when the financial climate becomes rocky, this is a useful technique to help reduce volatility and impact on your portfolio as opposed to weighing down all your investments on one asset class. In June 2022, financial and industrials were the top two performers, followed by IT, consumer staples, and healthcare.

Finding stable returns

With inflation continuing to squeeze household budgets across the country, 2022 is proving to be a challenging year across the board as investors search for alternative methods to protect their funds and hedge against the growing cost of goods and borrowing. Fixed-rate bonds are one of the few investment types that can help generate inflation-beating returns in such a tough market.

At Propiteer Capital, we focus on providing fixed-rate bonds to sophisticated and high-net-worth investors; a time-proven way to grow your money, giving you assurance when you need it most. Your investment is dedicated to high-quality development properties across the UK, with rates of up to 12%, beating the current Bank of England’s base rate of 9.1%.

Our Development Properties bond is a build-to-sell model that features high-end, recession-resilient residential properties in some of the UK’s most robust locations. Not only does this ensure profitability as unit values are based on local rent, but it also offers opportunities for diversifying your portfolio both by market sector and by economic region.

If you’d like to find out more about our inflation-beating fixed-rate returns, visit our website or connect with us on LinkedIn for regular market and company updates. If you’re ready to get started with us and have any questions, our helpful customer service team can be reached here if you have any questions.

Rates are accurate at the date of publishing. For our latest rates, please visit our homepage.

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