The case for UK corporate bonds with managed inflation risk | Insight Investment

David Hooker, Senior Portfolio Manager

“One of the most significant threats facing fixed income investors is that inflation proves to be far stickier than currently expected.”

Although it is possible to hedge inflation risk via gilts, this is an expensive way to do so. We believe a better solution is to combine corporate credit with an actively managed inflation component, utilising a combination of inflation swaps and carefully selected inflation-linked corporate bonds.

Insight has created an innovative solution for those investors wanting to invest in credit markets but worried about inflation. This approach provides:

• A thematic alternative to a mainstream corporate bond strategy for investors wanting to exploit credit yield premium with an element of inflation protection.
• Actively managed credit, duration and inflation risk, utilising inflation swaps and inflation-linked corporate bonds.
• A way for investors worried about the considerable inflation uncertainty we face in the years ahead to take advantage of the upward move in UK corporate bond yields.

The strategy seeks to maintain a significant hedge against inflation at all times, but varying exposure depending on market pricing with the aim of maximising protection during periods where inflation risk is under-priced, and minimising downside risk when markets are fully priced.