HEAD-TO-HEAD: Axa vs Pimco

123456

Pictured: Mara Dobrescu, Morningstar associate director of fixed income strategies

Although rising inflation is not an immediate concern for investors, as economies continue growing at a moderate pace and central banks have not been making policy errors, Stefan Lecher, managing director and head of IPS client portfolio management for APAC at UBS Wealth Management, considers it prudent to add some inflation protection to his portfolio.

He’s not alone: Inflation-protected bond funds have been seeing substantial net inflows from March 2016 to March 2017, according to data from Morningstar. Inflows slowed after April 2017, but remained positive.

Total assets under management in inflation-linked bond funds worldwide were $221.3bn at the end of July 2017, up from $185.1bn in July 2016, a 19.6% increase.

Also known as inflation-protected bonds or real-return bonds, the products are usually issued by governments, with very long maturities. Their nominal return is variable, linked to official measures of inflation in their domestic markets. As such, they are often used by institutional investors, in particular pension funds and insurance companies, to match those firms’ long-term liabilities.

Since inflation-linked bonds available on the market have, on average, long maturities and high durations, portfolios constructed of them also tend to have average durations much higher than typical nominal (non-inflation-linked) bond portfolios.

“Most of the funds in this category are going to be structurally very exposed to variations in interest rates,” Mara Dobrescu, Morningstar associate director of fixed income strategies, told FSA.

This characteristic can be considered both a risk and an opportunity. “As long as interest rates have been trending lower, it has been very positive for the asset class,” Dobrescu said.

Yields of inflation-linked bonds are relatively low (under 2%) but the returns have recently been high. The US-dollar-hedged inflation-linked fund category returned “double digits” in 2016, while the euro-hedged delivered around 8%, she said. “That’s quite a lot for a fixed income offering,” she added.

FSA compares two inflation-linked bond funds registered for sale in Hong Kong and/or Singapore: the Axa World Funds Global Inflation Bonds Fund and the Pimco Global Investors Series Global Real Return Fund.

Data: FE, Morningstar

123456