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M&G’s inflation-linked bond fund treads new ground

M&G’s inflation linked corporate bond fund aims to protect investor’s capital and income from inflation by generating returns that keep pace with UK inflation.

This fund is unique in focusing mainly on investment-grade corporate bonds. Other index-linked bond funds focus mainly on the gilt market as there are more index-linked gilts available to invest in than inflation-linked corporate bonds.

The fund’s return is expected to be around the level of the Consumer Price Index, the UK Government’s preferred measure of inflation, over the medium to long term. To achieve this, the fund invests mainly in investment grade corporate bonds, including inflation-linked bonds issued by blue-chip companies and those that are not inflation-linked, which perform well when inflation is high or rising. Other securities such as floating rate notes, which are short-term bonds issued by banks that are linked to money market rates, government bonds and derivatives may also be held to help the fund achieve its objective.

Joint fund managers Jim Leaviss and Ben Lord will combine top-down macro-economic research and bottom-up stockpicking. Leaviss, who is M&G’s head of retail fixed interest, joined M&G in 1997. He previously worked as an analyst, then a gilt and money market trader at the Bank of England. Lord joined M&G’s retail fixed interest team in September 2007 and was appointed fund manager of the M&G high interest fund in February 2009. He previously worked as a credit analyst at Gordian Knott.

Leaviss describes the fund as a UK corporate bond version of an index-linked gilt fund. He says the inflation-linked bond market is a relatively small at £11bn, with limited choice. However, he expects it to grow particularly if high inflation returns.

Leaviss expects a slowdown in the rate of inflation, or disinflation, to remain for some time and that interest rates will stay low. However, he says some investors do worry about inflation, partly because no one fully understands the impact that record low interest rates and quantitative easing has on inflation.

The ability to invest in other assets such as derivatives could make limited choice in the index-linked corporate bond market less of a problem in beating inflation. However, some advisers and their clients may feel that deflation is more of a concern, so this fund would not appeal.

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