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Link about the positive

As allocators begin the new year pondering what could soon be a falling inflation environment, we thought we would have a look at how inflation-linked bond fund managers have been allocating capital. 

The standout point may be the focus on exposure to global and Treasury Inflation-Protected Securities (Tips) at the expense of the UK.

In fact, 28 per cent of the capital in inflation linked funds is allocated to Tips mandates, and just 13 per cent to inflation-linked gilt funds.

Of course, the UK economy is much less than half the size of that of the US, and seen in those terms, 13 per cent may represent an overweight, but Asset Allocator readers will be very familiar with the concept of “home bias”, which keeps many clients overweight the UK equity market.

But the UK has also dominated the inflation-linked bond market for some time.

Indeed in recent months three allocators have purchased the iShares Tips ETF, making it now the second most owned linkers fund among the DFMs we cover.

Perhaps the turmoil in the UK bond market in the last few months of 2022 have encouraged DFMs to look elsewhere. 

The most owned is the L&G Global Inflation Linked Bond fund, which is held by five of the allocators we cover, the fact there were three sellers compared with one buyer in the final quarter of 2022 is likely a function of investors' evolving view on the inflation outlook than a comment on that particular fund.

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