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Fixed Income

Inflation-linked bonds always add value

A fixed income expert has recommended the inclusion of inflation-linked bonds in an investment portfolio, regardless of the levels of inflation the economy is experiencing.

Inflation-linked bonds can always play an important role within an investment portfolio, regardless of where the economy is positioned in the inflation cycle, a fixed income expert has said.

“I think [these fixed income instruments offer] really important protection for a lot of investors [and] I would actively be seeking to add these to your portfolio,” Fixed Income News Australia editorial director Elizabeth Moran told delegates at the Australian Shareholders’ Association Investor Virtual Conference held last week.

Moran acknowledged the Australian economy is currently experiencing low inflation levels and may even experience a deflationary period, but said this should not discourage investors from making an allocation to this category of bonds.

“Sure, there’s no question inflation is going to be low, but if it stays positive, returns will be positive,” she pointed out.

“If we go into a deflationary spiral, most of them have a condition where the face value of your bond, which actually increases with inflation and decreases with deflation, has a floor on it so there are other sorts of protection there.”

In addition, and with the current state of the economy in mind and the associated low interest rate setting, she advised investors to be mindful of the benchmarks adopted by any fixed income managers because they currently may not be providing an accurate measure of outperformance. She used the bank bill swap rate as an example.

“The bank bill swap rate has been coming down and I looked yesterday at it and it is 0.02 per cent. It is so low it is virtually zero,” she noted.

“So if you’ve got a fund that seeks to beat the bank bill swap rate at 0.02 per cent, well it should at least do that and quite a bit more.

“So really have a look at what your benchmarks are.”

She suggested investors should compare the performance of the fixed income funds they are using to similar funds they have an allocation to as a measure of the strength of returns generated rather than looking at the underlying benchmark.

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