What do we want? We want inflation protection, we want it now, and we want it, ideally, in a highly-reliable set-and-forget format please.

I’m a passive investor after all, and I’ve been hunting for alternatives since the passive investor’s choice of inflation insulation – a short-duration index-linked bond ETF – had a [checks glossary of terms] ‘mare during the post-Covid CPI blow-up.

The purpose of this article, then, is to run through the list of other potential antidotes to see how they actually performed when prices boiled over.

We’ve previously looked at the scale of defeat for short-duration index-linked bond ¹ funds, and also the so-so performance of the most obvious replacement – a DIY portfolio of individual index-linked gilts.

Here’s a quick refresher via a chart:

Data from JustETF, Tradeweb and ONS. February 2025

As you can see, neither of our index-linked contenders actually kept up with inflation. Disappointing.  

Partly the problem was that inflation-linked bonds were saddled with negative yields going into the pandemic inflation. And partly that the subsequent rise in yields – from negative to positive – inflicted a substantial price hit. 

Today a portfolio of individual linkers looks a good inflation hedge because they’re on positive yields. 

But assembling such a portfolio requires some work. For many, it seems like an arcane and fiddly task – like building your own microcomputer in the 1970s and ’80s. 

Isn’t there a BBC Micro, ZX81, or failing that, a VIC-20 of inflation containment you can just buy off the shelf? By which I mean a fund full of assets that eat rising prices for breakfast? 

We’ll answer that in the next six charts. They show how most assets that could be turned to as your chief inflation-tamer dealt with the money monster from October 2021 to year-end 2024.

Note: all returns in this article are GBP nominal, dividends reinvested.

Inflation vs money market funds

How did cash do, as represented by money market funds?

Data from Heriot-Watt/ Institute and Faculty of Actuaries/ESCoE British Government Securities Database and ONS. February 2025

Cash was comfortably trashed.

For comparison, the annualised returns are:

• Cash: 3.5%
• Inflation: 5.9%

Money market rates were positive versus inflation in 2023 and 2024, but not enough to make up the lost ground. What’s more, money markets have been a real-terms loser all the way back to 2009 (bar a 0.4% gain in 2015).

Cash is popular now. Rates are high and bonds burned many investors. But money market funds have historically provided a flimsy inflation defence.

Inflation vs gold

Gold had a stormer. In fact, without wishing to ruin the surprise gold was the best asset in our round-up. (Oh dear, I’ve ruined the surprise!)

Data from The London Bullion Market Association and ONS. February 2025

Annualised returns:

• Gold: 15.9%
• Inflation: 5.9%

Gold has a reputation as an inflation hedge. A distinction that’s surely been burnished by its recent performance.

But gold isn’t really tethered to inflation.

Even the few years covered by the chart indicate it dances to a different tune. Inflation whips up in late 2021 and absolutely rages in 2022. However, we’re firmly back in the realms of standard-issue 2.5% inflation by 2024.

Whereas gold is on fire in 2024, does merely okay in 2023, and registers a 0.1% real terms loss in 2022.

Overall, gold holders can be very happy with their choice this time, but its future reliability remains an enigma.

It’s entirely plausible that gold is propped up in inflationary situations because many people believe it is an inflation hedge.

They take refuge in gold as inflation rates climb while bailing on asset classes that succumb to price pressure.

The problem is the lack of:

1. A solid underlying theory which explains gold’s role as an inflation shield.
2. A string of historical examples that provide convincing proof that gold withstands the heat when CPI melts-up.

Gold at least seems to thrive during periods of great uncertainty – and inflationary shocks do contribute towards a general sense of systematic instability.

Inflation vs commodities

Raw materials are part of the very physics of inflation itself. Can they help us?

Data from Bloomberg and ONS. February 2025

Annualised return:

• Commodities: 5.9%
• Inflation: 5.9%

Commodities scored a draw – precisely matching the rise in headline rates over the period.

However, there’s a canary in the coal mine relationship between commodities and high inflation.

Rising raw material costs feed inflation, which means that commodities prices have historically front-run UK CPI by a year or so. If we zoom out to include commodities’ 28% gain in 2021, then we discover that the asset class did comfortably beat inflation after all.

There is also good evidence that commodities have historically outperformed other asset classes when inflation flares up. I’ll dig into this in more detail soon.

The other point worth making is that commodities are highly volatile and negatively correlated with equities and bonds. Rebalance sharp-ish when commodity prices spike and you may earn a juicy rebalancing bonus for your trouble.

Inflation vs World equities

The next chart seems to be saying: forget all the fancy stuff, just focus on pound-cost averaging and keep your head:

Data from MSCI and ONS. February 2025

Annualised return:

• World equities: 10.8%
• Inflation: 5.9%

Equities slipped below inflation’s high-water mark in 2022 and 2023. Only to surface and rise like a continental crumple zone, once the price pressure subsided.

Historically equities have typically reacted to inflation like it’s an essential vitamin. The right dose keeps stocks – and the rest of the economy – humming. But too much and financial weakness, nausea, vomiting, and cramps follow.

Still, equities have always recovered quickly once inflation has returned to reasonable levels. We saw that again this time.

Perhaps young, resilient accumulators should forget about hedging inflation and focus on outrunning it.

Inflation vs all-comers

Just for fun, here’s everything piled into one uber bar-room brawl of a graph:

If your portfolio was this diversified then you could hardly have done much more. Here’s the full rundown of annualised results, along with cumulative returns in brackets:

• Inflation: 5.9% (20.6%)
• Linker fund: 0.6% (2.1%)
• Cash / money market: 3.5% (11.9%)
• Individual linker portfolio: 4.1% (14%)
• Commodities: 5.9% (20.4%)
• World equities: 10.8% (39.5%)
• Gold: 15.9% (61.4%)

Personally-speaking, the recent price spiral has profoundly reshaped my portfolio. I have since sold my linker fund and bought individual index-linked gilts, gold, and commodities instead.

Hopefully that means that – in tandem with a chunky equity allocation – my portfolio is better equipped to meet future inflationary bow waves.

Still, if you go to an anti-inflationary arms fair, you’ll meet plenty of people willing to sell you on all manner of other solutions…

Inflation countermeasure or counterfeit?

Here’s a selection of oft-cited inflation-busters, charted over the same period as before only this time in ETF form:

Data from JustETF

As a range-finder, an MSCI World equities ETF (cyan line) hits the right-hand side of the graph at the 39.5% mark.

Inflation itself would score 6% – about double the red real estate line.

WOOD, the global timber ETF (magenta line), trails the pack with a cumulative return of 1.2%. I looked at UK property, too, which was the only fund to post a negative return over the period.

The clear winner is the oil and gas equities ETF (blue line). Fossil fuel supply shocks are often a large component of unexpected inflation. You’ll recall that Putin invaded Ukraine in February 2022, and unleashed energy blackmail against Europe soon after.

I’ve also included an oil and gas commodity futures ETC (yellow line). Initially it leaps too, hedging inflation up to year-end 2023. But it was no inflation-beater beyond that, lagging CPI by the end of 2024.

It’s intriguing that infrastructure (orange line), real estate, and timber all enjoyed bounces in early 2022 as inflation bit hard. But only infrastructure maintained its momentum before falling behind inflation in 2023.

True, infrastructure was an inflation-beater again by the end of 2024. But it only delivered half the value of the MSCI World during the period.

Finally, the Momentum and Quality factor ETFs haven’t added anything new beyond extra squiggles on the graph. It’s only a short timeline, but their correlation with World equities is much more apparent than any link to inflation.

Over-inflated

Okay, ‘less is more’ is the phrase that always comes to mind after a strong bout of inflation – or to one of my posts. Once again I’ve failed to master the art of shrinkflation when it comes to Monevator word counts.

So next time I’ll dig deeper into the UK’s extensive historical archives of high-inflation episodes to see which asset classes held the line against successive waves of money rot.

Time to slap The Investor with an enormous wage demand!

Take it steady,

The Accumulator

1. Colloquially known as ‘linkers’.[↩]

What caught my eye this week.

It’s not been easy to find reasons to be optimistic about the shrinking British stock market in recent years.

But I think how private investors, fund managers, the investment trust industry, and investment platforms worked together to defeat US firm Saba’s designs on the trust sector might qualify.

As I wrote last month, there was something of a last alliance vibe about this coalition of the unwilling.

But so comprehensively was Saba defeated – it lost all seven showdowns, and on large turnouts of private investors who overwhelmingly voted no – that the result was quite heartening.

This was shareholder democracy in action, and I’m all for it.

Moreover the platforms showed that they can facilitate such a democracy if called upon.

Your vote counted

In the early days of Monevator, lots of readers urged me to write articles about the evils of nominee share ownership and the demise of paper share certificates.

I saw their point. But I also saw the changes as inevitable and not the most important battle to win compared to, say, lowering fees or spreading knowledge about index fund investing.

Anyway such appeals stopped long ago, whether because the proponents accepted the change or because they moved on to a realm where their voice was even less influential than here on this mortal coil.

But wherever they are, I hope they’re heartened too.

Nominee ownership and representation via electronic voting on platforms does not inevitably mean disenfranchisement, or to be kicked around by those with the billions and the biggest boots.

And that is good news, whether or not you agreed with Saba’s charges and proposals. (Personally I share some of his complaints. But I was not persuaded by the remedy he was offering.)

He gets knocked down, but he gets up again

Saba is now going after a new quartet of trusts, suggesting they be turned into open-ended funds.

Curiously, Moguls-featured Pershing Square isn’t on the list despite its yawning discount.

Anyway, we’ll have to whether Saba’s relentlessness eventually exhausts the opposition.

More UK investors are apparently getting in on the act too. For example, the hugely talented Christopher Mills is said to be raising money for a trust that will work to close discounts at rivals.

As somebody who sees rife opportunity in the trust sector, I’m not surprised.

Though ironically two Mills-affiliated investment trusts themselves sit on 25-30% discounts…

Passive engagement

I’ll leave more comment in that direction for our Moguls member posts though.

Indeed for most Monevator readers who sensibly invest in index funds, this might all seem a bit irrelevant.

But I’d suggest it’s very relevant.

As index funds take up an ever-larger share of the overall investing pie, it’s really important that cheap and effective investing for the masses doesn’t become a lazy synonym for disenfranchised investors and the fracturing of shareholder democracy.

That charge has already being made as index funds have grown to dominate the investing landscape. For example, from the New Statesman:

The upshot of this mix is an ownership regime with a chief interest in maximising assets – whether by minimising costs to take market share, or by promoting general asset price inflation – and takes little interest both in how capital is allocated and how any company within its diversified portfolio is governed.

In other words, such an ownership regime takes no ethical stance on what those companies produce, how they are run, what they sell or what impact they have on the planet.

It’s a valid concern.

Squint though and you can see this battle with Saba as upholding the thin end of the same wedge that ends with Vanguard cutting fees further in the US recently.

The common thread is what’s ultimately in the long-term interests of ordinary shareholders.

Perhaps there’s even a future where even index fund investors get to vote their wishes somehow on the vast range of issues raising by the firms their tracker funds hold – albeit perhaps by aggregating their general wishes at the fund manager level?

Time will tell. But I’m more hopeful about that sort of thing than I was two months ago.

Have a great weekend.

p.s. Two corrections! We featured a wonky graphic in the email of TA’s linker piece on Tuesday. Thanks to reader Richard for the heads-up, and see the corrected post for the right graph. Then the next day TA achieved a – very rare for him – double by misstating the age you can open a cash ISA. You must be 18, of course. Sorry cash-loving youngsters! And cheers to reader Tommo for spotting what I missed.

[continue reading…]

The failure of index-linked bond funds to perform post-Covid has really been bothering me. What’s the point of these things if they don’t actually protect you from inflation? Meanwhile, individual index-linked gilts – correctly used – are meant to be a proper inflation hedge. But is that true?

Can we empirically prove individual linkers ¹ worked when inflation let rip?

First, some context. Our favoured linker fund holding at House Monevator prior to the post-pandemic price surge was a short-duration model. That’s because short-duration index-linked fund returns are more likely to reflect their bonds’ inflation ratchets, and are less prone to price convulsions triggered by rocketing interest rates.

Longer duration linker funds, meanwhile, got hammered in 2022 because they’re more vulnerable to rising interest rates. When rates soared, prices dropped so hard and fast that their bond’s inflation-adjustment element was rendered as effective as wellies in a tsunami.

Hopefully you at least avoided that fate…

The weakest link(ers)

So it’s October 2021, and you’re duly positioned on the coastline, scanning the horizon for inflation, with ample resources invested in short-duration linker bond fund units.

Here’s how our defences performed once the inflation Kaiju was unleashed:

Inflation versus short-duration linker fund

Index-linked bond fund is the GISG ETF. Data from JustETF and ONS. February 2025. NB. The linker fund trend line was corrected on 18 Feb 2025.

Oh. As that calm-voiced announcer-of-doom on Grandstand might have intoned: “Inflation One, Passive Investing Defence Force, Nil.”

Or, in numbers more appropriate to an investing article, the annualised returns from October 2021 (when inflation lifted off) to year-end 2024 are:

• UK CPI inflation: 5.9%
• Short-duration linker fund: 0.6%

Note: all returns in this article are nominal, dividends reinvested.

In other words, this linker fund fell far behind rising inflation and posted real-terms losses over the period.

Right-ho. So that was a learning curve.

Since then I’ve put a lot of time into researching individual index-linked gilts, commodities, gold and money market funds – all assets fancied as offering some degree of inflation protection.

The most reliable should be individual index-linked gilts. After all, they come with UK inflation-suppression built-in. Put your cash in, and it pops out at maturity, with a price-adjusted enamel on top. Purchasing power protected!

All you must do is not sell your linkers before maturity. Buying-and-holding prevents the kind of losses bond funds are vulnerable to realising. Funds’ constant duration mandates make them forced sellers when bond prices are down.

Excelente! But one thing was still nagging me. Did individual linkers actually deliver on their inflation-hedging promise during the recent price spiral?

Inflation versus individual index-linked gilts

To answer that question, I simulated the performance of a small portfolio of individual index-linked gilts using price and dividend data from October 2021 to year-end 2024.

Then I pitted the individual linkers against CPI inflation and GISG, the short-duration linker ETF discussed above.

Here’s the chart:

Data from JustETF, Tradeweb and ONS. February 2025. NB. The linker fund trend line was corrected on 18 Feb 2025.

Okay, the individual linkers (pink line) did better than the fund but they still lagged inflation. The annualised return numbers are:

• Inflation: 5.9%
• Individual linkers: 4.1%
• Linker fund: 0.6%

That’s still an unhealthy gap as far as I’m concerned – like buying a peep-hole bulletproof vest.

Proving a negative

Why did the individual index-linked gilts lose money versus inflation?

Because way back in 2021 they were saddled with negative yields. That is, the buy-in price for linkers was so high that their remaining cashflows were guaranteed to sock you with a loss, if you held them until maturity.

The best a linker portfolio held to maturity could do was limit the damage against inflation. But that negative yield drag meant it was always going to underperform.

But that’s a historical problem. Today index-linked gilts are priced on positive yields, so they can keep pace with inflation while sweetening the deal with real-return chocolate sprinkles on top.

The other point worth making is that my clutch of individual linkers were still susceptible to the downward price lurches that afflicted constant-duration bond funds.

The chart above shows a big dip in late 2022 when prices fell as interest rates took a hike, for instance. Think Trussonomics and other traumas of the era.

These are only paper losses to the individual linker investor who holds until maturity or death. Hold fast and eventually your bond’s price will return to meet its face value on redemption day (plus inflation-matching bonus in the case of linkers.)

Meanwhile, the bond fund is flogging off its securities all the time – profiting when prices rise and losing when they fall. That was a very bad design feature during the post-pandemic inflation shock.

My individual linkers’ price dip was smaller than the fund’s largely because I could choose to populate my modelled portfolio with shorter-duration bonds. Short bonds are less affected by interest rate gyrations, as discussed.

Still, I wondered if I was being unfair to the fund. After all, linker funds previously gained in 2020 as money flooded into the asset class.

One last chance for the linker fund

The next chart shows annual returns including 2020, the year before inflation ran hot.

Index-linked bond fund is Royal London Short Duration Global Index Linked M – GBP hedged. ² Data from Royal London, Tradeweb and ONS. February 2025.

Yep, 2020 was a good year for the linker fund. Interest rates fell and its price rose giving it a healthy lead over inflation, and the individual linkers. (Remember the fund profits by selling bonds as prices rise. Meanwhile, the longer average duration of the fund’s holdings meant that it enjoyed a stronger bounce versus my battery of gilts.)

There’s not much to see in 2021 – bar inflation engorging itself – but 2022 is the fund’s annus horribilis. It’s down 5.4% at face value and 16% in real terms. (Horrifyingly, the long-duration UK linker ETF, INXG, was down 45% in real terms that same year.)

Overall, incorporating 2020 does improve the linker fund’s showing. The annualised returns for the five year period 2020 – 2024 are:

• Inflation: 4.6%
• Individual linkers: 3.7%
• Linker fund: 2.2%

It’s still not enough. In my view, the best linker funds available were a fail when inflation actually came calling. I personally held both GISG and the Royal London fund at the time and became deeply disillusioned with them.

All change

The issue driving all this drama was that as inflation accelerated, investors demanded a higher real yield for holding bonds.

The average yield of the simulated linker portfolio above was -4.2% in October 2021. It had risen to 0.5% by December 2024.

When bond yields go up, prices go down. And that exposes the fatal flaw in linker fund design from an inflation-hedger’s perspective – the available products are always selling and even the short duration versions aren’t short enough.

Perhaps yields won’t surge as violently in a future inflationary episode.

But I don’t see why I’d take the risk when I can now buy individual index-linked gilts on positive real yields, hold them to maturity, and neutralise that problem. Individual linkers aren’t going to be slow-punctured by negative yields from here.

So I’ve ditched my index-linked bond funds. They were better against inflation than the equivalent nominal bond funds. But that’s not saying much.

There are other places to store your money so I’ll extend this comparison to the most interesting and accessible of those alternative assets in the next post.

Take it steady,

The Accumulator

Bonus appendix

If you’re interested in buying individual index-linked gilts then these pieces will help:

• Should you build an index-linked gilt ladder
• How to buy index-linked gilts
• Index-linked gilts: how to price, value, and track them in your portfolio
• How to build an index-linked gilt ladder

Are individual linkers better than linker funds?

At hedging inflation yes. At being more profitable, no.

For the avoidance of doubt, I’m not saying that a portfolio of individual index-linked bonds can magick up more return than a bond fund containing precisely the same securities.

What I am saying is that the individual linker portfolio is the superior inflation hedge when each bond is held to maturity. The design of constant maturity bond funds mitigates against matching inflation in the short-term, but should provide a similar overall return in the long run.

If you don’t care about hedging inflation then there’s nothing to gain by swapping your bond funds for a rolling linker ladder.

Fixed duration index-linked gilt funds could also hedge inflation effectively, but they don’t exist.

UK inflation versus globalised inflation

It’s worth mentioning that individual index-linked gilts are linked to UK RPI inflation (switching to CPIH in 2030). RPI was higher than CPI during the period so that’s helped my simulated portfolio claw back some ground against CPI.

By contrast, the short-duration linker ETF, GISG, currently allocates 14% of its portfolio to index-linked gilts. The rest is composed of other developed market, CPI-linked, government bonds: 56% US, 10% France, 7% Italy and so on. The point being that these other linkers don’t protect against UK inflation, though they do match related measures i.e. inflation in highly interconnected, peer economies.

As it was, inflation in these other countries was typically less than the UK’s post-pandemic. I haven’t attempted to calculate what difference this made but I think it’s another reason to favour an index-linked gilt investment product when you can get it.

Individual linker portfolio simulation

I didn’t want to bog the main piece down with a wander through the weeds (well, more than I already have) but for the record I’ll now show my workings.

The individual linker portfolio was constructed from three index-linked gilts, TIDM codes: T22, TR24, and TR26. Each gilt matures in the year indicated by the numbers in the code.

When each gilt matures, the redemption payment is reinvested into the next shortest gilt. For example, T22 is reinvested into TR24. I did not include trading costs for reinvesting dividends or redemption monies.

Relatedly, the performance figures for GISG and the Royal London fund are slightly affected by their OCFs of 0.2% and 0.27% respectively. But I don’t think these charges made a meaningful difference to the comparison over such a short time-period. The differential is too big to be explained by fund fees.

1. Index-linked bonds are colloquially known as ‘linkers’.[↩]
2. Full year data wasn’t available for GISG in 2020 or 2021 as it launched April 2021. However, only annual data is available for the Royal London fund.[↩]