Stocks and funds won’t help you beat inflation this year – but this investment trust just might

As inflation grinds higher, the search for investments that can keep up takes on greater urgency. We’ve covered some of the individual stocks that look equal to the task in other columns, but which investment trusts will preserve the real value of your money?

Savers have a number of options. Some trusts explicitly have this aim and we have tipped a few in recent columns; they include Ruffer Investment Company, Capital Gearing, BH Macro, RIT Capital Partners and Personal Assets. What these trusts have in common is the aim to preserve capital. What about investors who need income? Where can they get dividends that keep pace with inflation?

There are certain “equity income” trusts that can boast 50-year records of consecutive dividend increases. Impressive though this is, Questor wonders whether these trusts will be able to raise their divis in line with inflation when it is in double digits. They would need their holdings to increase their own dividends by that degree, which looks optimistic.

We need then to turn to other assets and the obvious choice is property. Real estate has several advantages. First, tenants have a legal obligation to pay rents, whereas dividends are discretionary. This makes rental income more resilient in troubled times, which will prove valuable if, as many fear, we have to contend not only with sky-high inflation but with a recession at the same time.

Second, many property leases stipulate that rents can only go up, not down, and often they must rise in line with inflation. However, we must be careful about our choice of property investment trusts. For a start, it’s no good having contracts that specify upwards-only, inflation-linked rent reviews if a recession or “stagflation” forces tenants into bankruptcy. So we need defensive parts of the market.

Next, inflation-linked rental contracts need careful scrutiny, as many cap the increases; 4pc is a common limit. These contracts were drafted in an era when inflation of even 5pc would have seemed a distant prospect, never mind the 9.1pc figure for May announced yesterday. Happily Questor has found a couple of property trusts whose contracts with tenants include no cap on the inflation link.

Triple Point Social Housing Reit is one. Its properties are leased to housing associations that house vulnerable adults and rents are backed by the state, so the income is secure.

While there are no caps on rent rises in its contracts, we must acknowledge, as its managers did last year, that in practice housing associations might struggle to pay the full increase at very high levels of inflation. That said, the recent 5pc rise in Triple Point’s dividend suggests that the associations are not struggling so far at least.

The finances of housing associations have attracted regulatory scrutiny, while a rival social housing trust has come under attack from a short seller. Questor feels that these negative influences are both fully reflected in the share price, which has fallen heavily in recent months.

At the current share price the increased dividend makes the yield 6.3pc. In our view the combination of income resilience, inflation linking and the high initial yield make this trust hard to beat for income investors. Buy.

Another strong contender is Residential Secure Income, which owns property in the shared ownership, retirement housing and local authority sectors. Its managers told Questor yesterday that in March they had chosen to extend a 6pc cap on some retirement home rent rises to all tenants in that sector. “A few complained and for them we carried out individual affordability assessments,” they said.

Its shared ownership tenants are subject to uncapped rent rises at the retail prices index plus half a percentage point and the managers said a rise on this basis at 5.5pc had gone through for most of these properties in April with no complaints.

Likewise rent rises on its local authority properties, which account for just 8pc of the portfolio, had “just gone through with no pushback”.

The managers said their aim since launch to keep pace with inflation “even at 30pc” was on track, although rent and dividend rises would come with a time lag. Another trust worth buying to keep inflation at bay.

Questor says: buy

Ticker: SOHO, RESI

Share price at close: 86.5p, 101p

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