It seems that the topic of inflation and interest rate rises are all the rage at the moment. That’s not unusual given that inflation rates are part of the input the Reserve Bank (RBA) uses to set its policy on interest rates.
The topic of interest rates is of intrigue to so many financial commentators because interest rates are one of the inputs into valuation formulas for many asset types.
Generally, interest rate increases have a negative effect on asset classes like the stock market.
Some ISG investors are questioning if we are worried about current rising inflation and interest rates, and are curious to know what it means for their investment with ISG. My answer is: no.
It’s true that inflation eats away at your purchasing power, meaning the $1 that you have in your pocket today doesn’t buy as much as it did yesterday. Inflation is the slow process of price increases for a basket of everyday goods in the economy. However, we don’t usually think in terms of purchasing power, we just notice that some things become more expensive over time.
Standard finance theory states that if you are not earning at least equal to the inflation rate or consumer price index (CPI) then you are going backwards in real terms. ISG investors have the luxury of obtaining returns well above CPI so the effect of inflation on the average ISG investor’s purchasing power is very benign.
But should investors be worried about the future of inflation and interest rates?
My answer is still no.
As many of our investors already know we don’t bother ourselves with trying to predict where interest rates or inflation will be in the future. We don’t partake in interest rate or inflation prediction speculation; in fact, we don’t partake in any speculative activity at all. It’s really unnecessary to be successful with investing.
We can only focus on what we can control and that what we do at ISG. All day, every day we focus on making our investment machine better than the day before, for the benefit of our investors.
History has proven again and again that what matters most in the end is the quality of your assets and their resilience to changes in demand, costs and competition. We have built and continue to build a resilient and adaptive investment system that can handle a wide range of economic conditions.
For example, the ISG Private Access Fund invests into long standing businesses that have traded for over a decade some for longer. These are tried and true private businesses that have stood the test of time.
Equally, the ISG Real Estate Equity Fund invests into prime real estate assets in areas with favourable supply / demand metrics. As a side note, real estate is generally considered a good inflation hedge.
With ISG’s current product offerings ISG investors don’t need to bother themselves with the noise of the interest rate or inflation cycle. ISG’s investments are a set and forget proposition. The reason is that ISG acts as a cushion of safety, or a safety zone between our investors and the marketplace.
Our current product mix delivers fixed monthly distributions with capital stability – we deliver certainty and consistency. You can consider ISG as the finance worlds equivalent of a graphic equaliser.
Just as a graphic equaliser reduces or increases a specific range of sound frequencies to improve sound quality, ISG balances a range of revenue, cost and valuation inputs to deliver consistent income streams and capital certainty – a high quality investment.
Business and property assets have survived all kinds of inflation and interest rate environments throughout history. Economies and humans, over the long term, will always thrive whatever the future interest rate or inflation environment is.
It’s not the end of the world if interest rates rise or fall, you just need to be able to adapt to the environment that’s presented – we believe that our investment system is ready for whatever the future may hold.
Ben Godfrey, CEO