Manager’s Insight: Equity Inflation Portfolio
INFLATION-LINKED BONDS
The objective of the Equity Inflation Portfolio is to mitigate the impact of inflation on your investment over the medium and/or long-term by investing in income orientated assets and growth-oriented assets using an active investment management approach. The Portfolio returned 0.60% in May 2014, taking the annual performance to 8.28%.
The Portfolio strives to mitigate the impact of inflation on your investment by owning a number of inflation-sensitive assets and asset classes. One such asset class is Inflation-linked bonds, as their name implies, are linked to inflation. This means that a dollar invested in this type of bond grows with inflation and pays interest on the increased amount.
Generally, the inflation is measured by the Consumer Price Index (CPI), a measure of how a representative basket of goods and services a consumer buys changes over time. This means that the bonds are linked to the cost of goods you are buying, the most important type of inflation to protect against. Inflation-linked bonds also have another benefit. they generally have a low correlation with major asset classes and so act as a valuable diversifier in the Portfolio.
Even though inflation remains rather benign, the current inflation-linked bonds in the Portfolio have performed well. The Portfolio currently owns a Transpower inflation linked bond, which has generated a return of just over 6% this year so far. This strong return could get even better if we see an unexpected rise in inflation this year, which is a possibility given our buoyant economy.
