Fidelity is changing the investment parameters of its £182m Fidelity Global Inflation Linked Bond fund, allowing manager Andy Weir to reduce average duration.
The portfolio, which was launched in 2008, will be given a new benchmark in early March, halving its average duration to five years.
Previously it was benchmarked against the Barclays Capital World Govt Inflation Linked (All Maturities) index, which had an average duration of 10 years. The new benchmark is the Barclays Capital World Govt Inflation Linked (1-10 year) index, which has an average five-year duration.
The change will allow the fund to move plus or minus two and a half years from the benchmark, giving Weir more options to avoid capital losses when interest rates are rising, and maintaining the fund's inflation protection mandate. Previously he could move plus or minus one year compared to the index.
"The change is the result of feedback from clients mainly, but it does make a lot of sense," Weir said. "If we do enter an inflationary environment, which obviously is when you need your inflation-linked bond, you might also get real rates going up as growth expectations go up.
"If you reduce your sensitivity to that real rate raise by halving your duration, actually the hedge is much more valid. You get inflation protection but you reduce your exposure to those real rates."
Weir believes inflation could surprise on the upside this year, and say this is not priced into the inflation-linked bond market.
"We are seeing lots of headlines about commodity and food prices, but we are also seeing growth data surprise on the upside and I do not see the US central banks acting hawkishly, so there is a risk inflation could tick up higher than expected."
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