QROPS ADVICE: Investment News: Spotlight on 'real asset' inflation hedging

During the recent, unprecedented times, governments worldwide have been called upon to utilise a range of financial and economic theories in a bid to alleviate the impact of what is now commonly referred to as a truly global recession. Whether packaged as 'Quantitative Easing' from the UK government, or the 'Troubled Asset Relief Programme' from the US, financial stimulus packages around the globe have been introduced to keep the flow and availability of finance constant. It is still far too early to gauge the success of such measures, however the Bank of England is currently revising its original suggestion that it will need "at least three months" to determine Quantitative Easing a success or not.
Whilst there is consensus that the need for such measures were absolutely necessary given the circumstances, history and many financial commentators point to a potential side-effect of introducing artificial financial injections to an economy; inflation. Inflation is a by-product of acceleration in economic growth of any market, brought about by sharp increases in the demand and subsequent price of local assets, goods and services. Such increases are particularly susceptible during times when interest rates are particularly low, given that more money is borrowed and spent as opposed to saved.
The Bank of England Chief Economist, Spencer Dale recently played down any risk of such a spike commenting "the BoE needed to be alert to the risk that quantitative easing could drive up asset prices but there is no evidence that is happening yet", although he went on to say that he felt that the local economy should expand "a little less rapidly" to avoid the possibility that quantitative easing might lead to an unwarranted increase in asset prices. Given that many of the world's economies have adopted similar measures to that of the UK (i.e. low interest rates and financial stimulus measures), the concerns of the BoE are shared globally.
Fundamental to the workings of most asset classes, inflation is something that fund managers cannot control, and as a result spend much of their time trying to predict. The reason for this is the intrinsic relationship between inflation and its effect on the 'true' value of any movement of an investment fund. If inflation is high or rising, assets held by fund managers will more likely be more difficult to attain and may deter from any added value that a fund manager creates, hence the reference to inflation as being a 'stealth tax' in investment management circles.
Many investors who share concerns for rising inflation revert to an investment practice that, in theory, is immune from the threat of inflation; inflation hedging. An inflation hedge is an asset that loses little value in periods of rising prices. Thus, it holds its value and its purchasing power during inflation. The types of instruments that fall into this category are often referred to as 'real assets', so-called owing to their intrinsic value, i.e. they have a value of their own and people value them for their direct or indirect usefulness, examples include gold, property, wheat, land etc. Real assets are the opposite to what many refer to as 'financial assets', which could be defined as something who's value is determined as a direct result of the fortunes of a related or un-related entity, e.g. stocks, shares, government gilts. The school of thought being that by definition, real assets have a value of their own, inflation does not erode their value. Thus, real assets are all considered to be inflation hedges.
There are a wealth of funds available that trade solely in 'real assets' and purposely avoid instruments that can be affected by the movement of inflation. It is for this reason that funds such as these are particularly well-regarded as being part of a diversified portfolio. The varied range of such funds is ever-changing, the most popular being commodity-focussed (e.g. precious metals, natural resources or agricultural), although there are some funds that will hold highly specialist assets such as fine art, fine wine or antiques.
Patrick Koupland of Castlestone Management, managers of the Hansard Aliquot Gold Bullion and Hansard Aliquot Agriculture fund commented "Many investors are looking to diversify their portfolios with exposure to gold and other commodities. Gold in particular can be used as a hedge against inflation, and with the recent global stimulus packages taking hold, a rise in inflation levels is widely considered as inevitable. However, this diversification cannot be achieved from a gold equities fund, which buys not the metal itself, but stocks in related companies such as gold mines. Direct exposure to such commodities is the only way to truly diversify. This has been proven over the past five years where gold bullion and precious metals have given a better return to investors than gold equity funds - and with less risk.
These assets are one of the best hedges against the devaluation of money while silver and platinum have the economic sensitivity to rise with the improving economy. A strong validation of this is the fact we have seen the Chinese, Indian and other governments piling in to gold and stockpiling other commodities."