INVESTMENTS - ADVERTORIAL buy a new ( albeit small ) car . When she eventually reached her 18th birthday , what did she buy ? A ski jacket ! A very nice ski jacket I ’ m sure but not especially good at giving her the mobility and freedom I ’ m sure she was hoping for . Turning a car into a ski jacket is some feat but give inflation time and that ’ s exactly what it will do .
Wage rises and inflation – a dangerous loop ? Over the past 40 years or more , we have been in a very benign inflationary environment . In fact , interest rates have come down , supporting huge growth in asset prices , as the cost of borrowing has become more affordable . Of course , we have had the odd inflation spike in that time . Who can forget the interest rate levels we saw in the early to mid-1990 ’ s for example ? But broadly , the more recent rises have not been a huge concern of investors because there hasn ’ t been any pressure to increase wages . This time , that has fundamentally changed . The pandemic has led to a huge surge in demand , as markets start to react to the easing of lockdown restrictions and demand increases to roughly prepandemic levels , whilst supply chains have been unable to keep up . In addition , there are now more jobs available in the market , so it ’ s possible for workers to move to new jobs for more money . And we ’ re starting to see some of these effects directly leading to wage inflation . Towards the end of last year Tesco hit the headlines when there were fears of a potential strike because some workers had rejected a 4 % pay rise as too little ! So what ? Why does wage inflation matter so much ? In effect , it ’ s because it ’ s the start of an increasing spiral ; as wages rise , workers are more able to support the increase in prices , which in turn leads to product manufacturers and service providers increasing prices ( to support enhanced wages ) and so on and so on …
Navigating uncharted territory Well , I think it ’ s officially time to retire the term “ transitory ” from our current inflation lexicon . Inflation is going to be with us for a while – markets are currently pricing at least 4 interest rate rises over the coming year , so in effect , we are being told that inflation will be with us for at least all of this year and probably most of next year too ! The worry investors have right now is how long will this last ? And the answer at this stage is unknown : nobody has had to deal with a significant and sustained increase in inflation for multiple years since before the 1980 ’ s , so we are potentially in uncharted territory . Asset values are also a concern – equities tend to do reasonably well in an inflationary environment , because companies can increase their prices to keep pace , or in some cases beat the pace of inflation , but to combat inflation , central banks raise rates and this will have an impact on bond prices because as bond yields rise , the bond price goes down . So , what to do ? Well , it ’ s generally a good idea to be invested in a multi-asset fund to ensure that you have good diversification , it ’ s also worth looking at the duration of the bond portfolio to ensure that the fund is not too exposed to interest rate rises – the shorter the duration , the less sensitive the bond portfolio is to interest rate changes , so ensuring that your multi asset fund manager is on the ball with the position of their bond portfolio is important .
The Aviva Smooth Managed Funds : giving clients some certainty for their investments Since the start of the pandemic , UK households have built up a lot of cash . In many instances this has been helpful as they have been able to reduce debt , but the inability to spend disposable income due to lockdown restrictions has led to excess cash holdings . This means that we all have customers with significant exposure to cash at a time when inflation is high and eroding our purchasing power over time .
THE PANDEMIC HAS LED TO A HUGE SURGE IN DEMAND , AS MARKETS START TO REACT TO THE EASING OF LOCKDOWN RESTRICTIONS AND DEMAND INCREASES TO ROUGHLY PRE- PANDEMIC LEVELS , WHILST SUPPLY CHAINS HAVE BEEN UNABLE TO KEEP UP .
The Aviva Smooth Managed Funds are built to offer a long-term expectation of return , providing a degree of reliability that your clients may be searching for during these uncertain times . They ’ re unit linked funds with a transparent smoothing process , offering clients the peace of mind that their investment won ’ t be impacted by some of the daily ups and downs of market volatility . Our Smooth Growth Rate is designed to deliver the Bank of England base rate + 5 % in pension and ISA and Bank of England base rate + 4 % in the bond – having an explicit link to the Bank of England base rate is particularly attractive in this environment as you can expect the returns from the funds to increase as the base rate rises . We believe that this solution is the only multi asset solution available in the UK market where there is a direct link to the Bank of England base rate .
Recommend with confidence The Smooth Managed Funds are now well established in the market – as an integral part of the Aviva brand , you know you ’ re recommending a fund with the financial strength of one of the UK ’ s largest insurers . And if you need any help , you ’ re expertly supported by my specialist SMF team .
Want more information ? Get the facts about the funds in our Smooth Managed Hub at https :// at . aviva . uk / 335QGFB
Would you like to speak to a Smooth Managed Fund expert ? Email my team at investmentspecialistsalesteam @ aviva . com to arrange a call back .
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