Barclays Global Investors has launched a fund that invests primarily in sterling-denominated inflation-linked bonds. The new fund, called the Real Return Fund, debuted last week with
£88.5 million under management and is being marketed to U.K. pension funds, says Keith Kelsall, inflation-linked bond strategist at BGI in London. There is increased demand for this type of investment as U.K. pension funds are under pressure to match assets and liabilities more precisely. Currently, the fund is 90% invested in inflation-linked government gilts, known as linkers, with the balance invested in a mixture of inflation-linked corporates and supra-nationals.
As the fund's assets under management increases, Kelsall says he will seek to diversify its investments to include U.S., European and Swedish inflation-linkers with appropriate currency hedges. In addition, the fund will gain use conventional gilts to gain exposure to the corporate credit sector where inflation-linked bonds are not overly abundant. Kelsall says the fund will buy conventional bonds, enter into a retail price inflation swap to gain inflation exposure and then sell credit default swaps to gain corporate credit exposure. That process is analogous to buying a corporate inflation-linked bond, says Kelsall.