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Group ratings: the inflation kings as bond rout fears mount

We take a look at the leaders in inflation-linked bonds as concerns over the health of the bond market grow.

Inflation-linked bonds took in nearly £3 billion globally in 2016. As measured by the Bloomberg Barclays Global Inflation Linked index, the sector returned 23.9%, outperforming the Citi WGBI’s 21.2% return.

As inflation continues to work its way through the developed world and the cyclical upturn continues, fears of a bond rout have mounted. The Citi WGBI is down 5.3% since the ascent of bond yields’ accelerated following the election of president Trump. The Bloomberg Barclays Global Inflation linked index fell 2.6%.

Performance in the UK government bond market has played out differently. Following very strong performance, the index-linked British Government All Stocks is down 2.9%, performing, worse than its non index-linked counterpart’s -1.1% return since 8 November.

Despite expectations that the long run structural growth rate will stay low due to population demographics and stalling productivity growth, the percentage change in year-on-year UK CPI for December shot up to 1.6%, its highest since July 2014.

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Inflation-linked bonds took in nearly £3 billion globally in 2016. As measured by the Bloomberg Barclays Global Inflation Linked index, the sector returned 23.9%, outperforming the Citi WGBI’s 21.2% return.

As inflation continues to work its way through the developed world and the cyclical upturn continues, fears of a bond rout have mounted. The Citi WGBI is down 5.3% since the ascent of bond yields’ accelerated following the election of president Trump. The Bloomberg Barclays Global Inflation linked index fell 2.6%.

Performance in the UK government bond market has played out differently. Following very strong performance, the index-linked British Government All Stocks is down 2.9%, performing, worse than its non index-linked counterpart’s -1.1% return since 8 November.

Despite expectations that the long run structural growth rate will stay low due to population demographics and stalling productivity growth, the percentage change in year-on-year UK CPI for December shot up to 1.6%, its highest since July 2014.

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Baillie Gifford

Baillie Gifford’s Steven Hay runs the Active Index-Linked Gilt Plus fund. His experience includes seven years undertaking analysis and research for the Bank of England’s MPC, and involvement in managing the UK’s foreign exchange reserves. Hay has had a very strong year, returning 27.04%, outperforming both the average manager, and the FTSE A (Index Linked) British Government All Stocks’ 24.33%, despite the sector’s bull run in the first half of the year.

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BNY Mellon Investment Management

Howard Cunningham and Dave Hooker run BNY Mellon’s offering in the sector. Hooker manages the Insight Inflation Linked Corporate bond and Insight Investment UK Index Linked funds. Over three years to December, Hooker has returned 31.96%. Cunningham runs the Newton Index Linked Gilt fund and over the past three years has returned 49.36%, beating the average manager’s 44%.

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Royal London Asset Management

The Royal London Index Linked fund is managed by Craig Inches and Paul Rayner. The duo increased their short duration position in December to 1.1 years short versus the benchmark as they expect real yields to continue to rise, with two long-dated syndications exerting upwards pressure. The fund continues to be overweight short-dated bonds, but also has a 10 year gilt position as a short breakeven trade.

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BMO Asset Management

At the helm of BMO’s proposition are duo Alex Soulsby and Robert Crewe. Soulsby and Crewe offer the UK investor the F&C Fixed Annuity Conversion and the F&C Inflation-Linked Annuity Conversion funds. The funds aim to reduce the annuity conversion risk for preretirement funds. The three years to the end of 2016 have seen the duo return a total of 45.51%, just beating the average manager’s 44% return in the sector.

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