Manager’s Insight – Inflation linked bonds

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.