Is this the ultimate inflation-beating fund?

An electricity pylon of the National Grid in Wales at sunset
Infrastructure investments, including in National Grid, can protect against inflation Credit: CW Images/Alamy

After falling to nearly zero in October 2015 inflation has jumped to 2.3pc this year and is set to rise further as the weak pound, following the Brexit vote, makes imports more expensive for us to buy.

This has sent investors scurrying to find assets that will protect the value of their money as the cost of living increases.

Shares in infrastructure companies, which operate utilities, toll roads, railways and airports, are seen as a good way to get inflation protection. The prices they charge for their services are often regulated by governments who link increases in their bills to the consumer price index (CPI) measure of inflation.

One of the best funds exploiting the inflation-linked returns from these companies is First State Global Listed Infrastructure, a £2.3bn portfolio investing in 40 stocks from around the world.

It is run from Australia by Peter Meany and Andrew Greenup at First State Investments who have a good performance record over the past three years.

The managers have been in charge of the fund since its launch in October 2007. During that time it has risen in value by 143pc, beating the 104pc return from the S&P Global Infrastructure index and the 110pc return from the average fund manager in the peer group.

These returns are after annual ongoing charges of 1.59pc and are impressive for what was traditionally regarded as a reliable but rather dull corner of the world stock market.

In recent years the ability of infrastructure companies to churn out good dividends irrespective of economic conditions made them attractive to investors, particularly when interest rates were slashed to near zero after the financial crisis, and their share prices did well.

The reputation of their shares as less volatile investments meant they were viewed as “bond proxies”, meaning that they were seen as similar in some ways to the fixed income stocks that governments and companies issue when they borrow money.

However, that could be a problem as rising inflation undermines the attractions of bonds and puts shares such as utilities under pressure.

“The most challenging periods to keep pace with stock markets are when a rising tide lifts all boats and immediately following a sharp rise in interest rates – as investors rotate into ‘cyclicals,’ ” said Mr Meany, referring to stocks exposed to the ups and downs of the economy.

Nevertheless, he is confident about the enduring appeal of the asset class to investors. “Markets will ebb and flow, politicians will come and go. We believe a 3-4pc yield growing at 5-6pc a year with lower risks than broad stock markets should always be in vogue for long-term investors,” he said.

Mr Meany also pointed out that some of the so-called “boring” utilities his fund held had invested in future growth by decarbonising their operations with investments in renewable energy, battery storage and smart meters. Active fund managers such as himself, he said, could tilt their investments to stocks like these that should be less sensitive to rising interest rates.

Most of the fund’s investments are in electric utilities which make up just over a quarter of the portfolio. The biggest holding is the UK’s National Grid at 6.8pc of the fund’s assets, followed by its US peers Pacific Gas and Electric (5.4pc) and American Electric Power (4.4pc).

Transport infrastructure occupies a further 18pc of the portfolio with the largest holding being a 5.1pc position in East Japan Railway Company.

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In geographical terms around half of the fund is in America, where President Donald Trump has ambitions to launch a $1 trillion infrastructure programme. The hope is that it will breathe life into the country’s ageing transport system, however, Mr Meany said it would not benefit the companies he invested in.

“If the package comes to pass the immediate beneficiaries would be construction, engineering and materials companies – in which we do not invest,” he said.

While it is possible that a few public-private partnerships could be started in the US, he believed the political sensitivity of privatising public assets would deter most.

Minimum investment in the fund is a £1,000 lump sum or £50 a month. The fund invests largely outside the UK, which means there is an added risk of currency movements affecting investor returns.

A sterling hedged share class, which eliminates the risk of currency movements, is available to investors who want to remove this risk. However, because of the cost of this “hedging” it is slightly more expensive, with an annual ongoing cost of 1.62pc.