Inflation has reached all time high levels, being situated around 8.1% as per the data provided by Eurostat. Among this, there is also a difference between the highest and lowest inflation rates among the 19 members of the Eurozone. For instance, in Spain, inflation has now reached 10.2%, in Greece 11.3% or in Belgium 9.65% and on the counterpart, countries like France or Malta are keeping inflation just over 5%.
Under this current situation, Euro Inflation-linked bond funds offer long-term protection against inflation. These types of assets enable investors to get a real yield that preserved purchasing power even when the levels of inflation are high. Inflation-linked bonds have a low correlation with stocks and nominal bonds and they also help to increase the diversification of a traditional portfolio.
With the above in mind, we wanted to take a look at the Euro Inflation-linked bond funds with better returns during this year.
AXA World Funds – Euro Inflation Bonds I Capitalisation EUR Redex
Jonathan Baltora, Head of Sovereign, Inflation and FX – Core Fixed Income at AXA Investment Managers
Inflation forecasts have risen steadily for this year, but according to Bloomberg economists, inflation remains transitory as inflation forecasts for 2023 are close to central bank targets. Meanwhile, data continues to reach record levels: 8.1% year-on-year in the US and 7.6% in the euro area.
While we are convinced that inflation will decelerate in the second half of 2022, we see a risk that this deceleration will not be as sharp as the market expects, and it is precisely the persistence of inflation over time that is fuelling fears that inflation expectations may have become unanchored.
Thus, the current high monthly inflation figures should translate into solid returns for inflation-linked bonds, and AXA WF Euro Inflation Bonds seeks to become a store of value, protecting investors’ assets against future inflation. The fund’s investment objective is to achieve medium-term returns (five years is the recommended investment horizon for this strategy) by investing primarily in euro inflation-linked bonds, and its benchmark is Bloomberg Euro Govt Inflation-Linked All Mat.
In the current environment, inflation-linked bonds with short maturities performed well thanks to robust inflation indexation. We therefore maintain our preference for shorter maturity index-linked bonds in order to capture generous carry and limit duration exposure, as inflation indexation should continue to be positive over the coming months. Longer maturities, on the other hand, suffered, perpetuating the upward trend in real yields seen in previous months in the eurozone, when we profited from this position by participating with AXA WF Euro Inflation Bonds in the inaugural syndication of the first green inflation-linked bond issued by the French government.
Natixis AM Funds – Ostrum Euro Inflation I/A (EUR)
Abdel-Rani Guermat, Global Inflation Portfolio Manager at Ostrum AM
Inflation is center stage in the financial markets and its effects have moved downstream, affecting household spending. There are many factors driving the increase in inflation such as global supply chain bottlenecks, demand for global resources and rising food, oil and energy prices as a consequence of the Russia/Ukraine conflict.
There are heavy tailwinds backing inflation, like relocations to regain sovereignty and climate related changes as we transition from traditional fossil fuel energy resources to alternatives. Today and looking forward, the environment is for more imbalances, thus despite government efforts and central bank policies, a heterogeneous inflationary environment is likely a valid scenario.In this context, the Ostrum Euro Inflation Fund, a medium-risk product with a recommended minimum investment horizon of two years, offers protection against inflation and variables that have a significant impact on inflation, such as interest rates.
The fund invests at least 75% in euro-denominated inflation-linked bonds issued by eurozone issuers and benchmarks the Bloomberg Euro Govt Inflation-Linked ILB 1 to 10 year TR Euro index. During the first half of 2022, the euro inflation strategy outperformed its benchmark, with a return of +0.20% gross of fees (-0.22% net of fees for the retail share class) versus -0.51% for its benchmark. Over a one year period, gross performance is +5.28%(gross of fees (+4.39% net of fees for the retail share class) versus its benchmark +4.48%.Over these periods, outperformance is due to diversified investment strategies such as short positioning on nominal rates, carry trades and the long positioning on break even strategies.
M&G (Lux) European Inflation Linked Corporate Bond Fund CI EUR
Matthew Russell, Portfolio Manager at M&G (Lux)
Nowadays, economic uncertainty weighs on investors decisions. Therefore, it is normal for investors to wonder whether it is the right time to be holding bonds. Still, we believe there are a few strategies that can be used to mitigate the negative impact of rising inflation and higher interest rates.
Within this context, M&G (Lux) European Inflation Linked Corporate Bond Fund offers a distinctive solution for investors looking to include an element of inflation protection in their portfolios.
The fund combines inflation-linked protection with the attractive yields that can be found with high-quality corporate bonds. At the same time, it offers a distinctive short duration profile, meaning low sensitivity to interest rate changes.
This fund seeks to capture the most attractively valued opportunities across global inflation-linked bond markets, with a minimum 90% of the fund hedged back to euro.
The fund also has a distinctive duration profile that is significantly shorter, typically maintained between 0-3 years, than that of a traditional index-linked government or corporate bond fund. This is designed to reduce volatility and mitigate the negative impact of rising bond yields, which are common in an inflationary environment.
It is worth keeping in mind that an inflationary environment can often be quite supportive for credit valuations. Therefore, keeping some exposure to high quality credit, while limiting the impact of an interest rate hike, may be a sensible strategy for those worried about an increase in the cost of the money.
Last but not least, as manager of the fund, I can freely adjust its duration, credit and inflation exposure based on my macro-outlook and assessment of valuations. This flexibility means the fund should be well placed to navigate the uncertain market environment currently facing investors.
State Street Euro Inflation Linked Bond Index Fund B EUR
The State Street Euro Inflation Linked Bond Index Fund offers investors a cost-effective and exposure to the Euro Inflation Linked Bond Market. With the outlook for inflation continuing to surprise to the upside, strategies that can offer protection from inflation risk increasingly deserve an allocation in investors’ portfolios.
While there may be other strategies that can protect investors from inflation, these can be expensive to access and crude in their inflation protection. With the State Street Euro Inflation Linked Bond Index Fund, investors gain access to protection from Eurozone inflation specifically and via this fund in a cost-effective and reliable way.
The Fund achieves this by tracking the Eurozone inflation linked market as measured by the Bloomberg Eurozone All CPI Inflation-Linked Bond Index. This benchmark consists of Euro denominated Inflation linked government bonds issued by France, Italy, Germany, and Spain. As indicated by its name, this fund is managed using an indexing investment style with the goal to consistently track the performance of the reference index as closely as possible. As can be seen from the performance table below the fund has done exactly that, with highly consistent and tight tracking to the benchmark over all periods since inception. In a period of rapidly rising rates, the fund has done very well in offering investors protection from rising inflation risks and thereby has provided diversification benefits in a difficult market environment for fixed income assets generally.
State Street Global Advisors are a global leader in fixed income indexing strategies with approx. €547Bn** of indexed fixed income assets globally. We have been managing Inflation Linked Bond strategies for over 20 years. Indexing in fixed income is our heritage, and both our investment process and investment team are structured and designed for indexing, in order to provide reliable, transparent, and cost-effective exposure to fixed income sectors for our clients. Our investment approach seeks to deliver the performance of the benchmark as efficiently as possible and not necessarily through full replication. Instead, we recognise the more fragmented nature of fixed income markets with its variable liquidity and the need to match benchmark along key risk dimensions rather than bond by bond. The key advantages of this sampling approach are that it significantly reduces turnover, and therefore trading costs, while also providing the latitude for our experienced and specialist portfolio managers to add value by exploiting inefficiencies in the market as they arise.
In the case of the State Street Euro Inflation Linked Bond Index Fund, because of the length of time since inception (almost 14 years) and also due the fewer issues that compose the benchmark and the reasonably good liquidity of Euro Inflation Linked Bonds, the fund is now at a state of almost full replication. Therefore, the fund is tightly aligned with the benchmark which will ensure low tracking error versus the benchmark. The tracking of the State Street Euro Inflation Linked Bond Index Fund attests to the effectiveness of this approach. As illustrated by the Table below, our investment process has ensured that, since the fund was launched in September 2008, we have delivered consistent results through multiple market cycles, financial crises, and liquidity conditions.