M&G UK Inflation-Linked Corporate Bond – a race against inflation

Jonathon Curtis | Tue 12 February 2019

The links in this article will take you to Hargreaves Lansdown’s main website for more information. Please be aware that if you wish to join any of the benefits in your company Plan you must return to this website to apply.

• Inflation’s been falling but many things could push it back up again
• Ben Lord thinks investing in short-dated bonds is a good way to beat inflation
• The fund’s kept ahead of the Consumer Price Index over the long term

UK inflation’s been decreasing recently. The latest figures from the Office for National Statistics show it’s at 2.1%, down from 3% a year ago. That means it’s virtually at the 2% target set by the Bank of England. But there are lots of things that could push it back up.

The value of the Pound’s been falling, making imports more expensive. Oil prices rose in 2018, increasing energy costs. Average pay in the UK is rising quicker than before, and unemployment is at record lows, so staff costs are increasing. The economy is growing just about as fast as it can without pushing up prices quickly.

Our view

Staying ahead of inflation protects the value of your wealth over time. Inflation can quickly eat away at your money. £1,000 hidden under your mattress 20 years ago would only buy around £579 worth of stuff today, compared with what you could buy back then.

Few fund managers invest specifically to keep ahead of inflation. Ben Lord is one of those few. He’s managed the M&G UK Inflation-Linked Corporate Bond Fund since it launched in 2010.

The fund offers something different to most mainstream corporate and strategic bond funds. Bonds, as well as equities, have historically grown faster than inflation. But they can be volatile and fall in value in the short term.

Lord aims to avoid most of that volatility. He sets out to protect investor’s wealth from the ravages of inflation rather than try to grow it significantly. He aims to counter the effects of inflation over time by either meeting or exceeding the Consumer Price Index (CPI).

He’s done a decent job of that so far. We think the fund’s a good option to achieve an inflation-like return in the long, though there are no guarantees.

How’s the fund performed?

Since the fund launched in September 2010 it’s grown 23.7%*. CPI increased 19.4% in that time, so Lord’s kept ahead of inflation. There have been short-term periods when he’s fallen behind though, notably between mid-2014 and early 2016. How the fund’s performed in the past doesn’t indicate or guarantee how it’ll do in the future.

M&G UK Inflation-Linked Corporate Bond performance since launch

Past performance is not a guide to the future. Source: Lipper to *31/01/2019.

Past performance is not a guide to the future. Source: Lipper IM to 31/01/2019.

How does the manager invest?

Lord thinks short-dated index-linked bonds are a good way to protect against inflation. Because they mature sooner than longer-dated bonds they’re less affected by changes in inflation and interest rates. So they can offer an inflation-like return, but with less volatility.

Over two-thirds of the fund is currently invested in index-linked bonds. UK Gilts make up about 40%, and US index-linked Treasury bonds another quarter.

Lord also invests in corporate bonds, which are higher risk than government bonds. He invests mostly in the lower end of the investment-grade quality scale. He thinks the yields they pay are worth the higher risk of the bonds defaulting.

The manager can invest in high-yield bonds and he uses derivatives to give him more flexibility to provide shelter against inflation, both of which are a higher-risk approach.

The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s Prospectus.

Manager’s outlook

Lord thinks UK Gilts are more expensive than they should be, and their price will eventually fall. If this happens it should push up the yield accordingly. He thinks the days of low Gilt yields are behind us and it’s best to invest in short-duration bonds.

He thinks inflation expectations are far too low, given how much US wages have been rising and unemployment has been falling. He also thinks the oil price has been falling too fast, and will invest more in US index-linked Treasury bonds if it falls further.

Lord expects the US Federal Reserve to increase interest rates, which has often led to other countries following suit. This has historically helped curb inflation, but Lord knows from experience that inflation doesn’t stay still for long.

Find out more about this fund, including charges

M&G UK INFLATION-LINKED CORPORATE BOND FUND Key Investor Information