Inflation can mean very different things to different companies. For issuers with pricing power, for example, the higher input prices lead to expanding sales and fatter margins, but those without pricing power may find themselves uncomfortably squeezed.
Of course, rampant, broad-based inflation is no good to anyone. But that’s not the situation we find ourselves in today. Rather, there are pockets of inflation spread around the globe, fuelled by a growing middle class in the developing world and loose monetary policy in western countries.
One investment firm making the most of this environment is GAM, the London-based fund manager, which last year saw its Star Global Equity Inflation Focus Fund return 40 per cent. Previously available only to GAM’s private clients, the fund has recently been opened up to the public, with the portfolio being run by US investment adviser Manning & Napier.
‘GAM’s private client business came to us and asked how we would manage an equity portfolio able to provide protection against inflation,’ says Greg Woodard, portfolio strategist at Manning & Napier.
The fund is flexible as ‘you may have low inflation in certain areas of the world, high inflation elsewhere,’ he explains. ‘You may have different cycles, and different companies are going to benefit at different times in those cycles.’
The fund has a global mandate, not for the purpose of achieving global diversification, but rather to not limit it to any particular region, so it can focus on regions where opportunities present themselves.
Within this broad view, Manning & Napier has identified six inflation themes it is trying to play: agriculture (which it calls ‘agflation’), fuel (which it calls ‘fuelflation’), materials, metals & mining, water, transportation and real estate. Of this list, the greatest emphasis has been placed on agflation and fuelflation, which can each be weighted up to 30 per cent of the portfolio.
Each of the inflation themes derives from a supply/demand imbalance. Take agflation, for example: rising prices in the agricultural market are largely being driven by secular demand trends in the emerging markets, where the growing middle classes are eating a greater quantity and variety of food.
As a simple example of how eating habits are changing, Woodard points to the fact that millions of people in the developing world are moving from one meal a day to two. ‘That is putting strains on the global food supply,’ he states.
Meanwhile, the demand/supply imbalance has been exacerbated by poor harvests and severe weather conditions in some of the world’s biggest exporters of food, such as Brazil and Australia.
[Article by Tim Human, IR magazine]