I make no apology whatsoever for returning — briefly! — to the theme of my previous column.
As I explained, I was sceptical of the Bank of England’s bland assurances on inflation back in the summer. I preferred the views of outgoing Bank of England chief economist, Andy Haldane, regarding inflation’s direction to those of his soon-to-be erstwhile boss at the Bank, bank governor Andrew Bailey.
Lo and behold, the Bank belatedly acknowledged in its rate-setting meeting in late September that it had probably got things wrong, and that inflation would, after all, exceed 4% by late 2021.
And, as I said in my last column, I think that this is a view of things that is something of an understatement, for the reasons I explained.
Now, we hear that Mr Bailey has warned other central bankers that the Bank is likely to raise interest rates in the next two months, to try to bring inflation back down. Yes, inflation is a problem, he seems to be saying — but just a temporary one.
Convinced? I’m certainly not.
Themes to profit from
All of which serves as a rather neat segue into the subject of today’s column: thematic investing. Or rather, my own particular take on thematic investing.
Now, thematic investing may not be a term you’re familiar with. As a concept, it’s not especially new, but the ‘thematic’ label hasn’t been around for long.
The basic idea is simple, and has long been practised by fund manager Baillie Gifford, especially with its stellar-performing investment trust, Scottish Mortgage. Essentially, it involves identifying big ‘themes’ in the global economy, and investing accordingly.
With Scottish Mortgage, it’s been hi-tech — the companies that the trust has backed, often when they were quite small, are the absolute crème de la crème of the hi-tech world.
Today, you’ll see thematic investing associated with themes such as genetics, drug discovery, clean energy, e-commerce warehouses, and space technology.
The latter three I’ve favoured myself, with clean energy holdings in Bluefield Solar Income, Foresight Solar Fund, and Greencoat UK Wind; e-commerce warehouses holding in companies such as Warehouse REIT and Tritax Big Box; and — more recently — a space technology holding in the form of Seraphim Space Investment Trust, acquired at its recent IPO.
Side plays – or not?
Although though I’ve done reasonably well with thematic investing over the years, it’s far from being a major component of my investment strategy.
Unless there’s a decent yield — which some thematic investing plays certainly offer — then I remain largely focused on equity income, buying holdings in companies or investment trusts that look well placed to pay me a resilient and growing income stream.
When I depart from that — as with Seraphim Space — then generally it’s a smaller investment than the amount that I typically invest. The icing on the cake, as it were, rather than the cake itself.
But with another thematic investing play that I’m actively mulling at the moment, that guiding principle might be going out of the window.
Because my practice of focusing on a resilient and growing income turns out to dovetail well with the theme that I’m contemplating: positioning more of my investments for an era in which inflationary pressures may be more severe — and more sustained — than the Bank of England is currently projecting.
Inflation-proof investing
More on that in a couple of future columns. Suffice to say that if inflation is sustained, then it’s time for investors to look for businesses with pricing power, and businesses where business models are inflation-neutral (or even geared to profit — such as banks), and businesses that are less exposed to inflationary wage demands.
My bet: the names to emerge will contain quite a few surprises. Defensive, price-insensitive businesses are rare, and often unregarded.
But right now, some Real Estate Investment Trusts (REITs), banks, retailers, and tobacco companies are looking good to me.
