Fixed Income  

Deflation risk is being ‘overpriced’, says Hooker

Deflation risk is being ‘overpriced’, says Hooker

A pricing discrepancy in protection against inflation has opened up because too many investors believe the UK will endure a long period of deflation, Dave Hooker has said.

The manager of the £46.9m Insight Inflation-Linked Bond fund said the risk of deflation was being “overpriced” in the market, so he had been targeting derivatives that protect against inflation.

The Bank of England’s latest Inflation Report stated inflation was “likely to fall further in the near term and could temporarily turn negative”.

Article continues after advert

While Mr Hooker acknowledged there were still some “domestic deflationary effects from the labour market” and externally from the strength of sterling, he thought the country would experience “subdued inflation” rather than outright deflation.

Mr Hooker runs his fund by investing in traditional corporate bonds and then uses an inflation bond derivative overlay to implement his view on inflation.

Given that investors are generally more concerned with deflation than inflation at present, inflation protection can be bought more cheaply. Mr Hooker has used this turn in the market to jump in and snap up some inflation protection.

The manager was more optimistic than most market participants because he said “the recent decline in inflation largely reflects the weakness in food and commodity prices”. Although he did admit inflation would remain close to zero during the first half of 2015 if oil stayed around its current level.

Mr Hooker has also been reducing the fund’s sensitivity to rises in interest rates, known as duration. The manager said the fund now had a duration of four years, down from five-and-a-half years at the back end of 2014.

Elsewhere, Mr Hooker added that while he liked UK corporate bonds, he had grown more optimistic on US debt and had been increasing his exposure to bonds from across the Atlantic.

The manager said he favoured financial bonds, such as banks and insurers, as the industry in the US was facing positive tailwinds.

Mr Hooker said his fund had outperformed its main direct peer, the M&G UK Inflation Linked Corporate Bond fund, since launch.

Data from FE Analytics shows the Insight fund has returned 6.5 per cent since it was launched in February 2013, while the M&G fund, run by Ben Lord and Jim Leaviss, has returned 2 per cent during the same period.