Ardea points to inflation-linked bonds
Specialist manager Ardea Investment Management has pointed to current industry discussion around "outcome-driven investing" as being an extension of Inflation Linked Bonds (ILBs) — which have existed in Australia for at least 30 years.
Ardea principal and portfolio manager Tamar Hamlyn said the company had experienced strong inflows from superannuation funds which were looking for tools to cope with on-going market volatility. These funds were at the industry, corporate and government levels.
He said the role of ILBs had been heightened by the current trend of institutions investing for a specific return after inflation.
Hamlyn claimed this was in contrast to striving for outperformance of benchmarks, which could be less relevant to end-clients.
He said that, by their very nature, ILBs provided an inflation-plus return — making them the ultimate objective- and outcome-driven investment.
Hamlyn acknowledged that in the current low inflation environment it could be easy for investors to become complacent towards the risk of inflation on a portfolio, but pointed to the higher likelihood of inflation spiking unexpectedly, rather than dropping suddenly, as a key reason for always including an element of inflation protection.
"Currently, inflation is at historically low levels, a factor which makes it easy for short-term investors to overlook the potential risk of inflation to a portfolio," he said.
"However, not including inflation protection in a portfolio is effectively making the bet that inflation will continue to drop — an outcome which would be difficult to achieve given how low inflation is already.
"With governments around the world engaging in multiple rounds of quantitative easing, the inflationary backlash is a question of when, not if. At such low levels, investors should be locking in inflation protection while it can be accessed relatively cheaply, and ensuring they have it in place for the full term of their investment horizon," Hamlyn said.
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