Questor Wealth Preserver: companies that can pass higher costs on to customers are likely to become increasingly attractive The Bank of England’s assertion that this period of high inflation would prove transitory is being severely tested. The consumer prices index rose by 6.2pc in the year to February 2022, compared with 5.5pc in January. Inflation has now been above the Bank’s 2pc target for seven consecutive months.
Of course, the war in Ukraine is likely to add to the upward pressure on inflation over the coming months. Commodity prices in particular have surged following Russia’s invasion. Alongside supply bottlenecks and the impact of a global economic recovery from the pandemic, they have contributed to continued increases in inflation expectations for the remainder of this year. Indeed, the Bank of England now expects inflation to reach about 8pc soon.
In Questor’s view, predictions about the future rate of inflation can only ever offer very limited insights for investors. As recent months have shown, unforeseen events inevitably occur that can cause forecasts to be proved wholly inaccurate. However, it seems increasingly likely that inflation will remain substantially above the Bank of England’s 2pc target for a sustained period. Although interest rates have been raised at each of the three most recent meetings of the Bank’s Monetary Policy Committee, the appetite for further increases could be limited by the prospect of a weakening economic outlook.
Moreover, prolonged levels of high inflation can gradually become a self-fulfilling prophecy as consumers spend more and save less in anticipation of further price rises. So far, the four commodity investments in Questor’s Wealth Preserver portfolio have made the largest contribution to our total return. They have gained 28pc on average since their addition to the portfolio in October last year and remain key holdings in our attempts to combat rapid price rises.
So too are our individual stock holdings, that have thus far underperformed but which have in our view a relatively high capacity to pass higher input costs on to their customers. Meanwhile, our holdings in property and gold, which have historically performed relatively well during periods of higher inflation, are likely ultimately to prove their worth should the cost of living continue to rise briskly. For now we will make no changes to the portfolio.
The portfolio’s most disappointing direct shareholding so far has easily been RWS. Shares in the patent translation company have fallen by 32pc since our purchase in June last year; a substantial portion of the decline took place following Russia’s invasion of Ukraine. The company has offices in Kyiv and St Petersburg, but announced last week that it would not provide services or technology to Russian‑owned businesses. This is very likely to have a negative impact on its financial performance and the company now expects to report results for the full year that are at the lower end of analysts’ forecasts.
In Questor’s view, RWS retains its capacity to generate strong growth that beats inflation over the long run. Importantly during a period of rampant price rises, it expects to deliver operational efficiencies in the next two years so that its margins in the 2024 financial year match those from the current year.