UK - Schemes are "insuring" their bond investments and protecting against future inflation by moving increasingly to index-linked securities, Baring Asset Management claims.
The fund manager said that even though inflation was currently very low, schemes could still lose up to almost 25% of the real value of conventional bond assets over 10 years if no action was taken.
BAM said that one way that schemes were insuring themselves against this risk was by using index-linked bonds. It pointed out that the UK’s 50 largest pension schemes already had 41% of their fixed income exposure in this asset class.
BAM fixed income investment manager Paul Grice said: “Index-linked bonds offer a solution. Not only do they protect an investor’s capital against inflation and generate an inflation protected income, but they are also a very good instrument for improving portfolio diversification as they behave very differently to other asset classes.”
And BAM chief investment officer Michael Hughes (pictured) explained that the current low inflation environment - where bond risk was determined not by inflation but by the current account and degree of debt - was also going to increase the supply of index-linked bonds.
He said: “Structural deficits and high debt require new forms of financing so more governments are going to be issuing index-linked bonds going forward.”
But in the shorter-term, politics could play more of a role in the value of bond investments than inflation - especially if John Kerry beats George W. Bush in next month’s US presidential election.
Merrill Lynch Investment Managers president and chief investment officer Bob Doll explained: “Fixed income investors would likely do better under a Kerry administration, due to his campaign platform of deficit reduction.
“His tax plan, which would eliminate some of the Bush tax cuts for high income taxpayers, would also benefit bond investors.”
This week's edition of Professional Pensions is out now.
Ben Gunnee reflects on 2018 and talks about the Fiduciary Management trends to keep an eye on in 2019
Lloyds Banking Group secured 630,000 new pension customers last year, according to its 2018 annual results.
Guy Opperman has rejected calls to speed up changes to auto-enrolment (AE) despite increasing pressure to boost contribution rates and overall savings pots.