CASE STUDY: My Inflation Beating Strategy

22 July 2022 - Sam Buckhurst opened his first ISA in the last year after starting a new job. Since he’s invested, the stock market has been volatile, it hasn't discouraged him too much, and he is carrying on investing monthly.

Sam, who is 24 and lives in London, initially found the prospect of investing in equities “a little overwhelming”.

“However on doing more research I realised that I did not need vast sums of money to start, and could invest a small amount each month. This has been great – I can set up monthly payments from my bank account and not have to think about.”

One of the main reasons he started to look more seriously at equity was rising inflation. His new job has allowed him put aside a bit each month, but he was concerned inflation would start to eat away at the value of these savings.

“Inflation has increased massively, and I knew one way of negating the effect of this on my savings was investing into funds with a more positive track record instead.”

There’s a confusing array of fund choices for novice investors, Sam says. Unsure where to start he used the fund recommendations provided by Chelsea Financial Services. “This is a detailed list of their most popular funds available on their platform alongside some recommendations. So the choices were narrowed down from thousands to a few hundred, which was a bit easier to get my head around.”

Sam has decided to split into regular monthly payment between four funds. These are the VT Chelsea Managed Aggressive Growth fund, MI Chelverton UK Equity Growth, Baillie Gifford Global Discovery and Fundsmith Equity.

All of these are on the higher end of the risk scale, he admits. “But it will be a long time until I need this money and I think these funds have the potential to grow well over the years.”

He points out that the VT Chelsea Managed Aggressive Growth fund is effectively a fund-of-funds, where Chelsea picks a range of mainly passive funds to achieve its investment goal of delivering higher-than-expected growth over the longer term.

The fund has grown over 50% since it launched in 2017, and has also won a couple of awards for its performance. According to Morningstar data it has delivered total annualised returns of 5.98% over the past five years. Its top holdings currently include Fidelity Index US, HSBC American Index, Taylor Maritime Investment and Polar Capital Biotech.

Gold-Rated Fund

Morningstar 5-star rated MI Chelverton UK Equity Growth is another relatively new fund, but one that has delivered for investors during this period. Morningstar also awards it Quantitative Rating of Gold.

The fund invests in UK-listed stocks with a bias towards smaller and medium sized companies, including those listed on the junior AIM market.

Although the fund has yet to clock up a full five-year track record, it has delivered total annualised returns of 11.47% over the past three years. However it is down by more than 21% in the year to date.

Meanwhile, Baillie Gifford Global Discovery is another fund with a strong track record. This fund has a Silver Rating from Morningstar (for its B-class shares) while slightly more expensive share classes retain Bronze Ratings. Morningstar analysts say the fund’s “differentiated approach” and experienced management team make this a suitable investment for long term holders.

They say: “[The fund management team] seeks to identify immature, ambitious, and entrepreneurial companies that are looking to scale up their operations on a global level. These firms typically offer solutions that larger companies are failing to address, and if successful, can offer investors asymmetric returns as they take market share and disrupt incumbents.”

Fundsmith in the Spotlight

Fundsmith Equity is highly popular fund private investors and has become the largest UK-domiciled fund in the UK. This is another fund with a Gold Rating, although slightly poorer performance in recent years has seen it move from a five-star to four-star rating.

Morningstar analysts also point out that the fund was issued a Section 166 notice by the Financial Conduct Authority in the first quarter of 2022. These orders can be issued for a variety of reasons although Morningstar says it may relate to the operational side of the business. The ongoing review is being led by four PWC employees and Fundsmith is limited as to what it can say during this process.

Morningstar adds: “There have not been major outflows as a result of this news. We will continue to monitor the situation but currently do not believe that it will have a major impact on the investment side of the business or to ongoing operations.

It adds: “It is somewhat natural for Fundsmith to receive additional regulatory scrutiny given its status as the largest UK-domiciled fund, though a Section 166 order does come as a slight surprise.” However, Morningstar notes that there has never been any enforcement action against Fundsmith.

Sam is not unduly concerned. As he is planning to say invested for the longer term so tries not to check individual valuations too frequently. “Stock markets have been pretty bad since I started investing but because I’m investing monthly my pot of money hasn’t done so bad. I wasn’t expecting to triple my money overnight, but it’s also nice that I haven’t lost loads either.”

At the moment this ISA is his main investment, although he does have a company pension from his job in finance.

Originally reported by Emma Simon at MorningStar. Read the article here

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and investor do not constitute financial advice.

Published on 22/07/2022