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Inflation-linked bonds could mitigate risk

Staff  |  06 Feb 2013Text size  Decrease  Increase  |  

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This article was originally published by staff at InvestorDaily, a Sterling publication.


Investors looking to reduce risk in their portfolios should look at inflation-linked bonds, according to Tyndall Asset Management (Tyndall AM).

Tyndall said investment managers and their clients should consider inflation-linked bonds as one strategy to protect their capital preservation, as inflation is one of the largest economic factors on asset price.

"The goal of capital preservation often focuses investors' minds on which assets provide inflation protection," Tyndall AM head of fixed income Roger Bridges said.

"We are experiencing a time of historically very low inflation and stimulatory monetary and fiscal policies.

"As a result, it is important for investment managers and their clients to consider investment strategies which address the prospects for unexpected increases in inflation expectations and higher actual inflation."

The total value of the inflation-linked bonds on issue in Australia now totals $40 billion, 74 per cent of which has been issued by the Commonwealth government through the Australian Office of Financial Management.

Tyndall has said while these bonds are a tool to mitigate risk, their weighting in a portfolio should depend on an investor's unique circumstances.

"If inflation were to unexpectedly increase, inflation-linked bonds can help protect portfolios as they are likely to outperform nominal bonds as the correlation between the two declines," Bridges said.

"However, the validity of their inclusion and their weighting in a portfolio will depend on the particular business and investment requirements of each investor."