Governments and central banks have been following a policy of quantitative easing over the past few years, which essentially means increasing the amount of money in the economy.
Many warn that this will lead to an inflationary environment, arguing that the laws of supply and demand mean if there is more money around it will become worth less. If this is true, holding cash and many fixed interest assets will actually deliver negative real returns to investors.
For investors worried about this phenomenon, FE Trustnet – with the help of leading market commentators – highlights a number of open-ended funds which can give your portfolio inflation protection.
M&G UK Inflation Linked Corporate Bond
Rob Morgan (pictured), analyst at Charles Stanley Direct, is a fan of Jim Leaviss’ M&G Inflation Linked Corporate Bond fund.
| Name | M&G UK Inflation Linked Corporate Bond |
| Fund size | £600.7m |
| Min. investment | £500 |
| OCF | 1.17% |
| Yield | 1.36% |
| Manager | Jim Leaviss & Ben Lord |
| FE Crown rating | N/A |
According to the fund’s factsheet, M&G UK Inflation Linked Corporate Bond “invests in a range of fixed interest securities that should perform well when inflation is high or rising.”
Leaviss’ fund can hold fixed income assets such as inflation-linked government bonds, floating rate notes, senior secured loans, conventional corporate bonds, sovereign debt and alternative investment strategies like credit default swaps in order to beat inflation.
The fund differs from others in the sector in that the manager can create his own inflation-linked corporate bonds by creating assets from a combination of government bonds and derivatives.
The £600m fund uses the Consumer Price Index (CPI) – an index which measures inflation – as its benchmark.
Since the fund’s launch in September 2010 it has returned 12.37 per cent, while the IMA Sterling Strategic Bond sector has returned 19.88 per cent. However, it has considerably outperformed the CPI over that time.
Performance of fund versus sector and index since September 2010
Source: FE Analytics
Old Mutual Global Strategic Bond
Morgan also likes FE Alpha Manager Stewart Cowley’s Old Mutual Global Strategic Bond fund as it uses the fixed income to generate returns higher than inflation.
| Name | Old Mutual Global Strategic Bond |
| Fund size | £929.6m |
| Min. investment | £1,000 |
| OCF | 1.12% |
| Yield | 1.9% |
| Manager | FE Alpha Manager Stewart Cowley |
| FE Crown Rating | 1 Crown |
The £929m Old Mutual Global Strategic Bond fund has a relatively low yield of 1.90 per cent.
However, since Cowley has taken over the fund it has returned 41.46 per cent while the IMA Global Bond sector has returned 39.60 per cent.
Performance of fund versus sector and index since June 2009
Source: FE Analytics
It has beaten the JPM Government Bond Global index by 10 percentage points over that time.
Cowley recently told his investors that his main strategic positions are “holding index-linked government bonds given central bank reflationary policy, allocating to robust corporates and allocate currency to growth engines and fiscally robust nations”.
The fund’s largest individual holdings are US treasuries, gilts and index-linked US treasuries.
L&G Dynamic Bond
Charles Younes (pictured), analyst at FE Research, says that FE Alpha Manager Richard Hodges has taken inflation precaution within his L&G Dynamic Bond fund.
“Hodges has a concern, not over the short term, but over the medium term about inflation,” Younes said. “He currently holds a lot in high yield and is short investment grade non-financials. However, there are two important themes within his portfolio in relation to inflation protection.”
“Firstly, he holds around 14 per cent of his portfolio in index linked government bonds. The second major point is that all of his bonds are set to mature by 2015 and 2016. He believes that inflation will mean central banks will have no option but to increase interest rates.”
“He has positioned his fund so that the bonds he holds should reach maturity by that time so he can simply reinvest when interest rates increase,” he added.
| Name | L&G Dynamic Bond |
| Fund size | £1.7bn |
| Min investment | £500 |
| OCF | 1.42% |
| Yield | 4.5% |
| Manager | FE Alpha Manager Richard Hodges |
| FE Crown Rating | 1 Crown |
Hodges has managed the £1.7bn L&G Dynamic Bond fund since its launch in April 2007.
The fund currently has a yield of 4.5 per cent and it has been the best performing fund in the IMA Sterling Strategic Bond sector over five years. It has returned 72.34 per cent over that time, beating the sector by 34.5 percentage points.
Performance of fund versus sector over 5yrs
Source: FE Analytics
It is worth noting that the fund has been slightly more volatile than the sector over the period.
Younes likes CF Ruffer Total Return for investors who are concerned inflation, but still want some exposure to the equity market.
“It is a multi-asset fund and the managers take a very long term investment approach,” he said.
“They have been concerned about inflation for the last few years and have a high allocation to index-linked government bonds. They feel that at some stage interest rates will have to rise, so they have put “swaption” on interest rates so if they were to rise the fund will make money,” he added.
| Name | CF Ruffer Total Return |
| Fund size | £2.9bn |
| Min. investment | £1,000 |
| OCF | 1.53% |
| Yield | 1.8% |
| Manager | FE Alpha Managers David Ballance & Steve Russell |
| FE Crown Rating | 2 Crowns |
The £2.9bn CF Ruffer Total Return is run by the FE Alpha Manager duo of David Ballance and Steve Russell.
It has been a top quartile performer in the IMA Mixed Asset 20%-60% sector over 10 years and has been the best performing fund over five years. Over that time it has returned 70.93 per cent, while the average fund in the sector made 24.36 per cent.
Performance of fund versus sector over 5yrs
Source: FE Analytics
Richard Troue (pictured), investment analyst at Hargreaves Lansdown, says investors should look to the M&G UK Inflation Linked Corporate Bond fund if they want a something to balance their portfolio.
However, he says that if they want inflation beating income as well as capital appreciation they should lean towards equity income. “Equity income is still one of my preferred ways to achieve inflation beating return. With equity income you may well have short term volatility, but investors need to keep their eye on the long term,” he said.
“Across the sector, funds are offering inflation beating yields. I would highlight something like the Invesco Perpetual Income. It offers a decent yield and the manager takes a very long term view,” he added.
| Name | Invesco Perpetual Income |
| Fund size | £10.3bn |
| Min. investment | £500 |
| OCF | 1.68% |
| Yield | 3.22% |
| Manager | FE Alpha Manager Neil Woodford |
| FE Crown Rating | 5 Crowns |
The five crown rated Invesco Perpetual Income fund is managed by industry legend and FE Alpha Manager, Neil Woodford.
The £10.2bn Invesco fund has a headline yield of 3.22 per cent and has been one of the top performing portfolios in the UK equity income sector space it was launched more than 30 years ago.
Over ten years, the fund has been the second best performing fund in the IMA UK Equity Income sector with returns of 250.26 per cent, beating the average by more than 100 percentage points in the process.
Performance of fund versus sector over 10yrs
Source: FE Analytics
Though the fund has been second and first quartile over five and three years, respectively, it has underperformed against the sector over 12 months.