What will rising inflation mean for Vitality investment solutions?

In part two, Andrea Gianellini, Senior Investment Analyst for VitalityInvest, explores everything you need to know about how rising inflation will impact the VitalityInvest fund range.

Together with Dynamic Planner and SEI, we have reviewed the effects of inflation on the asset allocation of Vitality investment solutions.

We have identified the key features of the funds which make us comfortable that they are well positioned to protect your clients against the risk of rising inflation, while remaining within the risk profiles of the funds target.

Here, are things you need to know about our VIRO and EnVIRO funds in relation to rising inflation and the current economic climate.

1. The fund ranges do hedge against inflation.

Our funds are exposed to inflation-linked bonds, particularly in the lower risk-profiled funds. They also have a tilt towards value stocks, through higher exposure than global indices to UK and Japanese stocks.

2. Funds are designed to track long-term asset allocation.

Our funds are agnostic of short-term trends and market dislocations. We avoid adding any short-term tactical positions that may have the effect of increasing the risk exposure of the funds to levels which may not be appropriate for their intended objectives. Our chosen Dynamic Planner asset allocation framework expresses these views and are monitored. To ensure that the asset allocation is in line, Dynamic Planner do the following:

• Conduct ongoing research on the impact of the inflation/interest rates,
• Stress test the asset allocation based on extreme scenarios,
• Monitor the development of these scenarios.

As a result, the fund range is well positioned for the current economic environment. The asset allocation was last updated in Q4 2021 and remains reflective of the current environment . Both VIRO/EnVIRO saw a decrease in the duration of corporate bonds, and the introduction of short-term global corporate bonds. These changes reduce the effect of rising rates, higher inflation and projected inflation on the funds.

3. The fund ranges have a strong focus on liquidity.

Some asset classes which may hedge inflation risk (such as commodities and infrastructure) can be particularly illiquid, causing dislocations in pricing and eventually affecting returns and overall client outcomes. Liquidity is also the rationale behind why we replaced the exposure to property and high yield bonds, with investment in equity and investment grade bonds.

Risk-adjusted multi-asset funds in a challenging climate

Abhimanyu Chatterjee, Chief Investment Strategist, Dynamic Planner told Insights Hub: ”The current market environment continues to prove immensely challenging for the construction of risk-adjusted multi-asset funds.”

Despite this, Dynamic Planner’s Investment Committee is “committed to delivering clear risk-adjusted consumer driven asset allocation outcomes”, he added.

“While setting the asset allocations we have considered the implications of elevated episodes of market volatility and different inflation scenarios on the allocations.”

He explained that its stress tests also consider the impact of inflation on various asset classes. This allows the risk allocation to provide certainty that clients’ investments remain exposed to “the level of risk expected”, even in the face of difficult economic conditions.

“We are also of the opinion that though inflation is running high, this is not demand driven,” he said, “Consumer confidence is high, leading to consumer demand, but this is in not at levels which can fuel excessive inflation.”

He explained that in the current environment, higher inflation is driven more from the supply side and this was disrupted when the economies were shut down. “To restart such a large machine requires energy – which is what we are seeing through the increased commodity and transportation prices,” he said. “We expect this to stabilise but we remain alert to Central Bank activity, as we are concerned that excessive interest rate hikes could lead to policy over shoots, leading to headwinds for the fragile, post-pandemic growth.”

Global Multi-manager fund range and inflation

In partnership with SEI Investments (SEI), we offer five ready-made, risk-profiled multi-manager funds. Each fund is diversified across up to six asset classes, 20 sub-asset classes and up to 70 investment strategies from some of the world’s leading managers. There are three ways they are able to tackle inflation.

1. SEI can take advantage of short-term trends.

Much like our VIRO/EnVIRO ranges, the strategic asset allocation of the funds is designed to be agnostic of short-term trends and market dislocations. SEI can take advantage of this through the addition of short-term tactical positions – this is carried out through their ongoing research and risk management framework.

2. The strategic and long-term positioning of the fund range contains hedges against inflation.

The funds are exposed to asset classes which are inflation sensitive. For example, inflation-linked bonds. They also have exposure indirectly by aiming to provide a diversified source of income and returns – e.g. through income strategies and absolute return. Most importantly, the equity strategies adopted by the funds are more value orientated - this provides more defensive exposure to high-inflation cycles.

3. The tactical overlay is designed to protect against the risk of rising inflation expectations.

SEI are currently expressing a diversified ‘reflation’ theme. This allows the funds to benefit from higher inflation expectations and is an additional active layer of protection against the risk of inflation.

Important information.

VitalityInvest is a trading name of Vitality Corporate Services Limited. Vitality Corporate Services Limited is authorised and regulated by the Financial Conduct Authority.

Past performance should not be taken as a guide to the future performance and there is no guarantee that an investment will make profits: losses may be made.

VitalityInvest makes every effort to ensure that the information provided in this commentary is accurate and complete but no guarantee or warranty is given. This commentary is for general information purposes only and is not to be relied upon in making an investment or any other decision. Nothing in this commentary constitutes investment, legal or any other advice. This commentary is for investment professionals only and any retail customers should speak to an authorised financial adviser before making any investment decision.

Sources:
1. https://adviser.vitality.co.uk/adviser.vitality.co.uk/media-online/advisers/literature/investments/fund-documents/viro-strategic-asset-allocation-review.pdf