Legal & General Global Inflation Linked Bond Index research update

Adam Laird | Tue 14 July 2015

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The Legal & General Global Inflation Linked Bond Index Fund tracks the Barclays World Government Ex UK Inflation Linked Bonds GBP Hedged index. It covers index linked bonds from around the world, excluding the UK.

Why invest in global index linked bonds?

A common aim for investment portfolios is to keep pace with inflation over the long term. If investment growth is lower than the inflation rate, the purchasing power of the investment is falling.

Index linked bonds are one way of linking the value of an investment to the inflation rate - the interest they pay and the value eventually returned to investors will vary with the global inflation rate. Globally, inflation is low at present, but a portfolio of these bonds could offer some protection if it begins to rise. Although it is important to remember that the value of investments can fall as well as rise, so investors could suffer loses.

In the UK, index linked bonds follow the UK's Retail Price Index (RPI), which is considered the main rate of inflation faced by the average UK individual. By contrast, the Legal & General Global Inflation Linked Bond Index Fund invests across the globe, so many of the bonds held track the inflation rate of other countries.

There are a number of reasons to consider a global index linked bond fund instead of a UK index linked bond fund. Many of the goods and services we use in the UK come from abroad. When we import these, we also effectively import some overseas inflation. Therefore there is an indirect link between UK and global inflation.

There can be yield benefits to investing in global index linked bonds. The yield on this fund was 1% on 31 May, compared with 0.2% for an equivalent UK index linked gilt tracker funds. However, all yields are variable and not guaranteed. These may also be relatively more sheltered if interest rates rise in the UK. Bond prices generally fall when rates increase, but overseas bonds can offer more protection. The duration (sensitivity of a bond to changes in interest rates) is much lower than that of UK inflation linked gilts.

The index and fund are hedged back to sterling. Hedging is a process by which the fund fixes the exchange rate on overseas investments. This gives the portfolio shelter against currency movements. Currency hedging can work both for and against the fund - it will protect the value of investments if the pound strengthens, but the fund will not benefit from a weakening of the pound.

Fund performance

The Legal & General Global Inflation Linked Bond Index is a tracker fund. The team at Legal & General invest in the fund with the aim of producing similar returns to the Barclays World Government Ex UK Inflation Linked Bonds GBP Hedged index.

The fund invests in almost all of over 100 bonds held in the index. It holds enough holdings to follow the index closely, but it currently avoids the additional costs associated with holding every bond in the index. The fund is currently around £220m in size but will be able to invest in the remaining holdings as it grows.

The fund is managed by Legal & General's expert tracker fund management team. Though this fund was launched in August 2013 the team, comprising more than 30, have a record of managing tracker funds for over 25 years. Legal & General is one of our favourite tracker fund managers. They have a cautious approach to managing the funds, avoiding activities like stock lending which could add risk. We believe their process should allow the fund to perform accurately in the future.

Outlook

This could be a difficult period for global index linked bonds, there are two key risks.

First is the inflation rate, which remains low globally. Over 60% of the fund invests in the United States, where inflation remains very low - just 0% at the last reading. Across continental Europe (which occupies around 30% of the fund), inflation is just 0.2%.

At times this year many countries globally have entered deflation. Deflation is bad for index linked bonds as it reduces the eventual value repaid by the bond issuer. If deflation became a world-wide issue, it could result in the value of the underlying investments held in the fund to fall.

The second risk is interest rates. Rates have been static in Europe and the USA for several years, but could start rising again in the next 18 months. If interest rates rise sharply, we could see a fall in the value of the fund - the low yield on index linked bonds makes them look less appealing when interest rates are higher.

We believe this fund is a good long term holding that aims to protect capital from the effect of inflation. It has a low ongoing charge fixed at 0.17%, and in our view continues to merit its place on our Core Tracker list. Please note a charge of 0.45%p.a. also applies to hold funds in the Vantage Service.

Find out more about the Core Tracker funds

Past performance is not a guide to future returns.

Full year performance figures before this date are unavailable. Fund launched 28th August 2013, class C units launched on 9th December 2013 . Source for figures: Lipper IM, correct as at 01/07/2015.

Past performance is not a guide to the future.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.