M&G Investments has launched its UK inflation linked corporate bond fund, which is co-managed by Jim Leaviss, the head of the retail fixed interest team, and Ben Lord.
Apart from inflation-linked corporate bonds, the fund can also invest in other fixed interest securities such as floating rate notes. In addition, it can hold a combination of assets, including government securities and derivatives whose returns behave in the same way as inflation-linked corporate bonds.
Among the 150 names in the portfolio are direct holdings in more than 30 issuers. These include, for example, Tesco, Thames Water and Toyota. The overall credit weighting is A- and the duration stands at 3.4 years.
With 55 per cent of the portfolio is invested in index-linked corporate bonds issued by blue chip companies. There are about 20 issuers within this part of the fund, the biggest positions are in Anglian Water, EDF, EIB, Thames Water, Toyota and Tesco.
Another 22% is held in index-linked gilts, 7 per cent in floating rate notes, 5 per cent in short-dated conventional fixed rate bonds and 4% in index-linked private finance initiatives.
However, M&G says this breakdown will alter over time as the economic environment changes.
Leaviss and Lord can gain exposure to credit through synthetic positions created by stapling inflation-linked gilts to a credit default swap. If, for example, the managers have a physical portfolio of 25 per cent in index-linked gilts they can staple a credit default swap on top of that, which means selling insurance against a credit event.
Considering the fund’s exposure to credit derivative indices, it has now exposure to about 150 issuers.
Lord says combining both physical and synthetic investments should allow them to perform well during times when inflation is high or increasing. Although he and Leaviss expect the disinflationary environment to remain for some time, they highlight that inflation can rise very rapidly and unexpectedly.