Inflation spike brings capital preservation pain for income investors

From Prime Value Asset Management

The rise in global inflation is making it harder for income investors to preserve capital, according to a fixed income expert.

Investors may need to look for cash alternatives as inflation accelerates, according to Matthew Lemke, fund manager (income funds) with boutique investment house Prime Value Asset Management. “This is becoming more relevant as inflation rises globally with supply side shortages and bottlenecks due to the pandemic.

“While this may be a short-term blip, a return to more normal economic activity will see inflation move progressively higher longer term, which will erode investor savings.”

Lemke said investors benefited from having some stability in their portfolios, but this was now harder to achieve using traditional asset classes. “Investors are being let down by ‘no risk’ traditional cash holdings, which are going backwards against inflation.”

An emerging alternative for investors is diversified income or cash enhanced funds, which diversify across unlisted securities to deliver above inflation returns at the lower end of the risk spectrum.

“Quality, diversified income funds can provide more stability. They provide important ballast to a portfolio over time whilst earning an above-inflation return.

“This protects the real value of hard-won savings.”

Mr Lemke said such funds were becoming more popular with investors looking for a middle ground between cash and more volatile assets. Lemke currently manages the Prime Value Enhanced Income Fund, which aims to return the 90 day Bank Bill/Swaps (BBSW) rate plus 2% net of fees.

The Prime Value Enhanced Income Fund returned 3.26% net of fees for the 12 months to 31 May 2021. It is currently ranked top performer among its ‘cash enhanced’ peers for performance over three months, one year, and five year time periods, according to Yield Report.^[1]

Since inception the Fund has delivered a 2.94% return per annum, net of fees, for the period ending 31 May 2021. When franking credits are included, the net return increases to approximately 3.45% per annum.

Lemke also manages another income alternative with a different risk profile, the Prime Value Diversified High Income Fund, which aims to achieve 5% per annum returns and has achieved this since inception in 2019.

Boutique manager Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing equities, income securities, direct property and alternative investments.

Source: Advisor Voice