Last week's announcement that National Savings & Investments (NS&I) are withdrawing their Fixed Rate and Index Linked Savings Certificates after only 4 months came as no surprise, but it is the lack of access to alternative inflation linked savings which is causing investors most concern.
NS&I aren't the most fashionable investments to own in a world where all eyes are on the next opportunity, but they can perform a valuable function in a well diversified portfolio, if they are competitive. Where else can you find Government backed guaranteed returns? In uncertain times though, unfashionable may be the right strategy.
The Certificates were always going to be in high demand and we were surprised at how long they stayed open in the current climate. This could be because investor risk appetite and confidence has improved or because inflation is no longer the ghost hovering above. We have always maintained that inflation will arise, will persist and in a perverse way be encouraged by Central Banks in an effort to inflate away debt, but there is an argument to suggest that we are all coming to terms with this now and that actually inflation may become less of a concern in 2012. That would be a big judgement to make, but we believe that portfolios should be inflation- proofed where possible to counter the effects of persistent inflation anyway.
Investors still have options in this area and it may be pure coincidence that National Grid also announced the launch of some inflation-linked corporate bonds last week. We believe this to be a growth area, which hasn't yet rewarded investors handsomely, but bears all the hallmarks of doing so long term. It wouldn't be unheard of for Governments to turn to blue chip companies to provide the inflation proofing services they can't afford to provide themselves.
Index linked savings accounts via banks and building societies do exist, but beware the small-print, sometimes the terms can be inflexible and less tax efficient than you might think.
Commodities, equities and property are alternative inflation hedges, but do require investors to accept more risk to their capital without guarantees. Commodities and infrastructure equities can offer a counter balance to the movements in general equity markets whilst also offering long term, inflation linked yields. For those willing to accept more risk, then arguably equities are historically proven to beat inflation, just don't rely on them in the short term.
We invest with a simple belief, if something is too good to be true it generally is, and if it isn't you probably need to stock up whilst you can, before it's too late.
Tags: Certificate, investment, portfolio, inflation, investors, equities, interest rates