M&G Investments UK Retail Inflation Linked Corporate Bond Fund
M&G Investments is launching an inflation-linked corporate bond fund aimed at UK retail investors. We believe it is the first such fund for this market.
The M&G UK Inflation Linked Corporate Bond Fund will invest in a spread of fixed interest securities that should perform well when inflation is high or rising. It looks to deliver returns that exceed inflation over the medium to long-term.
The fund will be managed jointly by Jim Leaviss, head of M&G's retail fixed interest team, and Ben Lord, fund manager. Performance will be driven through a combination of top-down macro-economic calls and stock selection.
Among the fund's investments will be inflation linked corporate bonds issued by blue-chip companies; floating rate notes (FRNs - extremely short-term bonds linked to money market rates issued by banks); and a combination of assets including government securities and derivatives whose returns behave in the same way as inflation-linked corporate bonds.
The official launch date is 16 September 2010. 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.
Disinflationary outlook
Jim Leaviss says: "We believe that we will continue to be in a disinflationary environment for some time and interest rates will remain low. Nonetheless, some investors do worry about the resurgence of inflation, partly because no one fully understands the impact on inflation of record low interest rates and quantitative easing.
"Our response to these concerns has been to design a fund which looks to allow investors to have exposure to credit yet still protect their returns if high or rising inflation returns to the UK economy."
Jim expects the UK's relatively small inflation linked corporate bond market to grow from its current size of just £11 billion*, particularly if high inflation does return. Investors can already buy inflation-protected bonds from companies such as retailer Tesco or utility service National Grid, but choice is limited.
"This new fund, which I believe is genuinely innovative, will enable retail investors to gain access to a market that is in its infancy. It follows the launch in 1998 of the M&G High Yield Corporate Bond, the first such fund for retail investors. Today, high-yield corporate bonds are a staple of many investors' portfolios," says Jim.
"Put simply, the new fund is the corporate bond equivalent of an index-linked gilt fund.
It should protect the value of investors' income and capital over the medium to long term."
Product details
The fund will invest primarily in investment-grade UK inflation-linked corporate bonds and other fixed interest securities such as FRNs. For the sake of portfolio diversity, the managers will also have the ability to invest in a combination of assets including government securities and derivatives whose returns behave in the same way as inflation-linked corporate bonds.
The fund qualifies for inclusion in an ISA. The annual management fee for Sterling A class shares is 1 per cent and the initial fee is 3 per cent. Minimum initial investment is £500 for lump sums and £10 for regular monthly contributions. IFAs can receive up to 3 per cent initial commission and annual trail payments of 0.5 per cent.