UK inflation-linked gilts are expensive, so corporate inflation-linked bonds may offer better value. Private investors can access these via funds such as M&G UK Inflation Linked Corporate Bond Fund, run by M&G's head of retail fixed interest, Jim Leaviss, and credit specialist Ben Lord.
M&G UK Inflation Linked Corporate Bond Fund is just two years old, but M&G's longer-running bond funds have very strong track records.
The fund aims to protect the value of capital and income from inflation via a return consistent with or greater than inflation, as measured by the Consumer Prices Index (CPI), over the medium to long term. The fund should do well when inflation is high or rising, although it may, at times, have a different return profile to mainstream corporate bonds. Its duration profile is much shorter than other corporate bonds or index-linked gilt funds, which helps protect it from rising interest rates.
The fund mainly invests in investment-grade corporate bonds such as inflation-linked floating rate notes and asset-backed securities, but can also use derivatives. Investment-grade bonds are those rated as triple B or above and considered the least likely to default.
Recent additions include conventional bonds issued by retailer John Lewis, which pay a coupon of 8.375 per cent and mature in April 2019. The fund managers say this is an attractive way to access the credit rally.
M&G UK INFLATION LINKED CORPORATE BOND A Inc (GB00B3WZMB82) | |||
PRICE | 105.21p | MINIMUM INVESTMENT | £500 |
IMA SECTOR | Sterling Strategic Bond | TOTAL EXPENSE RATIO | 1.17% |
FUND TYPE | Oeic | 1 YEAR PERFORMANCE | 2.58% |
FUND SIZE | £346.52m | 6 MTH PERFORMANCE | 3.92% |
No OF ISSUERS | 108* | 3 MTH PERFORMANCE | 2.76% |
SET UP DATE | 16-Sep-10 | YIELD | 1.08% |
MANAGER START DATE | 16-Sep-10 | MORE DETAILS | www.mandg.co.uk |
Source: Morningstar, *M&G.
Performance data as at 26 March 2012.
Top five issuers as at 29 February 2012
Tesco | 4.4 |
Toyota Motor | 3.7 |
Severn River Crossing | 3.2 |
National Grid | 2.2 |
Rabobank | 2.1 |
Credit rating breakdown
AAA | 11.2 |
AA | 9.4 |
A | 42.7 |
BBB | 27.60 |
BB | 3.20 |
B | 2.60 |
No rating | 1.9 |
Cash | 1.4 |