Publicly traded infrastructure and property funds are expected to generate strong returns in the coming year even if inflation falls.
Retail investors are increasingly exploring ways to hedge against high inflation amid record levels of inflation, after the Consumer Prices Index hit 9% for the year through to April 2022.
Google searches for inflation hedges rose 24.8% in the past month, according to Google Trends.
Alternative investments such as listed real-estate investment trusts are commonly viewed as hedges against inflation and used as a means to diversify investments in traded companies that are likely to be hit hard by price rises, with broker Liberum predicting they will offer “high single-digital total returns”.
Cash flows from such closed-ended real estate and infrastructure funds are either directly or indirectly tied to inflation, with rents rising as prices increase.
The top inflation hedges in the UK with exposure to alternative investments are the AEW UK REIT PLC (LSE:AEWU) and Tritax Big Box REIT PLC (LSE:BBOX), according to Liberum, which has recommended both stocks as a ‘buy’.
AEW UK REIT has a market capitalisation of about £196.4 million and a premium to net asset value of 12.7%, meaning it is priced highly compared to its net value, but generated total returns of 40.1% over the past year, offering a 0.76 correlation with inflation, according to Liberum.
Another REIT with high returns is BMO Commercial Property, which generated a 35.2% return over 12 months and has a 0.41 correlation with inflation.
Tritax Big Box REIT has a market cap of £3.69 billion and delivered returns of 1% over the past year with a discount to net asset value of 9.6%.
Liberum warned that “even some alternative investments that used to have a high correlation with inflation in the past now show poor returns”, with the FTSE 350 and FTSE Closed-End Fund Index both falling short of the inflation rate over the last year.
It advises investors to focus on “trusts that have historically shown high correlation with inflation and high returns over the last 12 months”.
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