Henderson's Bill McQuaker has increased exposure to index-linked bonds in recent weeks on the view the global economy faces a "meaningful risk" of higher inflation in the medium-term.
McQuaker, who runs three Henderson multi-manager vehicles, has exposure to both UK and global linkers, through the Royal London Index Linked and Global Index Linked funds. The manager has a 5% weighting to linkers in each of his portfolios.
While McQuaker concedes inflation-linked bonds current offer low real yields, the manager believes the assets will be in high demand should inflationary pressures build in the medium-term.
"Real yields are quite low, but since we first bought the positions the real yields have gone a lot lower and we benefited from this Bearing in mind we have the short position in gilts, the linkers even this out a bit and it has been quite helpful during the recent rally," the manager says.
"I can see some near-term inflation pressures in the UK, but in other parts of the world I cannot. However, I do think there is meaningful risk of inflation, rather than deflation, further down the line. Ultimately it can be damaging to both equities and bonds.
"If this is how the world develops, these apparently low real yields of 1.5% to 2% will look really attractive when other asset classes are seeing negative real returns. In this environment we could end up owning one of the few assets people really want to have."
McQuaker, who also has exposure to gold bullion, says he could increase the allocation to linkers if the inflationary picture becomes clearer.
"It is a starting point and puts the asset class on the radar screen," he says. "If evidence of inflation accumulates further down the line we will build on this position and use it as a way of protecting investor capital."
Bill McQuaker was voted the top Cautious Managed investor at the 2010 Investment Week Fund Manager of the Year Awards.
The Aviva Investors Multi-asset Funds (MAF) target equity risk rather than absolute volatility. Thomas Wells, Multi-asset Fund Manager, explains that while absolute volatility varies significantly over time, the inherent risk of investing in equities remains relatively constant.
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