The Fund seeks to provide protection against inflation by investing primarily in investment grade inflation-linked bonds. It may also invest in nominal bonds and other debt securities issued within developed markets around the world.

 

The fund

  • Aims to provide long-term capital growth.

  • Offers inflation-linked exposure across differing monetary and economic cycles.

  • Targets attractive real yields without sacrificing credit quality.

Meet the Sanlam Fixed Interest Team

Peter Doherty
Peter Doherty
Head of Fixed Income
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Guillaume Desqueyroux
Guillaume Desqueyroux
Fund Manager
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Darren Reece
Darren Reece
Fund Manager
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Thomas Wells
Thomas Wells
Fund Manager
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Chris Turdean
Chris Turdean
Investment Analyst
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Why invest in the fund?

  • Inflation is re-emerging after a long period of dormancy – it has been a non-issue for decades but that is beginning to change
  • Our fund size and flexible approach mean we can allocate to select corporate bonds
  • Investing globally means we can take advantage of bond features that don’t exist in the UK, such as deflation floors and mitigating duration risk
  • Diversification benefits - One doesn’t need to be an inflation believer to benefit from inflation-linked bonds
  • Risk profile of the asset class – even if inflation doesn’t emerge, inflation-linked bonds can still perform*

*Low or disappointing GDP growth would mean a continuation of very low interest rates, which is supportive for long duration assets such as global inflation-linked bonds.

We view global inflation-linked bonds as being similar to a type of insurance – all diversified portfolios should have some exposure to them, in our opinion, due to their low or negative correlations to equities.

The fund was launched in 2017 as a dependable but fully active global inflation-linked product for private clients and Discretionary Fund Managers – as such repeatability of performance, transparency of investment process and value for money are key considerations. We want to offer our investors a genuinely global fund for a price that is comparable to some Exchange Traded Funds.

We believe an active approach in markets is important; we can take advantage of pricing anomalies (say, between on-the-run and off-the-run bonds) and the flexibility of our investment approach means that we can adjust our positioning quickly.

One doesn’t need to be an inflation believer to benefit from inflation-linked bonds

Thomas Wells, Fund Manager

Fund Commentary

October 2021

Market/macro backdrop
October was a challenging month for nominal fixed income markets as ongoing supply chain problems, concerns about inflation and hawkish central bank rhetoric (particularly in the UK) all weighed on sentiment. However, while conventional bonds had a difficult month, inflation-linked bonds performed strongly as investors began to acknowledge the possibility that inflation might not be transitory. Energy prices have soared in recent weeks and there is little sign of that abating, with some analysts suggesting that the market is one supply disruption or storm away from $100 oil. Natural gas prices remain elevated and continue to pose a major headache for energy-intensive industries and consumers.  The price of soft commodities has also soared, with the FT’s ‘breakfast’ indicator – based on futures prices for coffee, milk, sugar, wheat, oats, and orange juice – climbing by more than 60% since 2019.[1]

Looking at the headline inflation data, US CPI remained robust at 5.4% year on year and the less volatile core measure came in at 4.0% compared to the same period a year ago. In Europe, euro-area inflation rose to a 13-year high and in Germany CPI is running at 4.5% - a level not seen since the early 1990s.[2]

 
[1] Source: FT, 29 October 2021.
[2] Source of all inflation data – Koyfin, 1 November 2021.

 
Performance
The Fund produced a performance of 1.56% in October (source: Morningstar – X Acc units).



Past performance is not a guide to future performance. Total return, NAV to NAV basis, net of charges, assumes net income reinvested.



Positive and negative contributors 
Overall it was an encouraging month as the Fund posted a strongly positive total return. Inflation is a hot topic now in markets and this helping to buoy demand for inflation-linked assets. Markets such as Japan and Australia have continued to be useful diversifiers as we get paid on the FX hedge.

On the downside, there was a big rally (three standard deviation move) in the UK post the Budget (as Gilt issuance isn’t going to be as quite bad as feared), so that caused us some relative pain as we’re underweight the middle of the curve in the UK.


Significant portfolio changes - buy/sells 
We topped up our exposure in Europe – it’s a region we continue to like as real yields have been resilient through the recent period of volatility and the outlook for euroland base rates remains benign – something European Central Bank President Lagarde has been keen to emphasise in recent weeks. This is in stark contrast to markets like the UK, where the official rhetoric has been very hawkish and many market participants are anticipating rate rises – and a potential policy mistake.


Corporate/team highlights
Not applicable.

Outlook
As we have been saying for some time, we think that investors need to consider the possibility that inflation could be something other than a ‘transitory’ phenomenon. We have never expected a re-run of the very high inflation as seen in the 1970s, but we do think that there is a painful process of supply chain readjustment taking place as the world adapts to the new realities and challenges posed by Covid. It is also clear to us that the costs of de-carbonising the planet will be significant and that many of the materials that enable that transition are in short supply. It’s also becoming apparent that to make meaningful progress on climate change in the emerging markets, developed world nations will have to contribute and that is a cost that will ultimately be borne by consumers. More broadly, globalisation had crushed inflation for decades, but that era now looks to be over.

Bond markets have already reacted to this new reality by pushing short end yield materially higher, leading to a bear flattening of the curve. Bond traders are nervous and increasingly concerned that the Fed and ECB are potentially too relaxed about inflation. Real yields have been resilient through this period of uncertainty and volatility, once again underlining the diversification benefits of inflation-linked bonds.
 

Explore the details
Offering inflation-linked bond exposure across different economic regimes and inflation environments. The fund will also invest selectively in corporate inflation-linked bonds.

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Fund Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. A table with five years’ performance is available in the fund factsheets.

The Fund will invest in debt and debt-related securities. The government or company issuer of a bond might not be able to repay either the interest or the original loan amount and therefore default on the debt. This would affect the credit rating of the bond and, in turn, the value of the Fund.  If long-term interest rates rise, the value of your shares is likely to fall. The Fund may invest in companies based in emerging markets, which may involve additional risks due to greater political, economic, regulatory risks, among other factors. Financial derivative instruments may be used for the purpose of hedging and efficient portfolio management. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions.

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The value of investments and any income from them can fall and you may get back less than you invested.