Bond fund aims to avert inflation risk

By using financial futures, the Collins Stewart Total Return Bond fund will hedge its own exposure to fixed income assets to take away market risk. It will then look to take the rising yield from bonds to produce a positive return even if capital values fall.

“This is a turbulent time for yield and capital values for fixed interest,” says Jim Goodey, chief investment officer at Collins Stewart and manager of the Total Return Bond fund. He argues that while official data suggests inflation in the UK is running at a rate of about 1.5%, there are more inflationary pressures in the economy than this suggests.

“The cost of mortgages has risen, the cost of servicing credit cards is high, council tax is going up by at least 7.5%, water bills are increasing by 25% and electricity and gas are up 12.5%,” says Goodey. “Wage rises are running at about 4%, and this is even before the higher oil prices are taken into account.”

There will, therefore, be more inflationary pressures next year than are currently expected by many commentators and investors, argues Goodey. This higher inflation is likely to encourage investors to move into equities, at least in the short term, leading to a fall in capital values of bonds.

The fund will invest directly in bonds to produce an income that is paid twice yearly, in June and December. Up to 30% of the portfolio can be invested in corporate bonds, but Goodey says it will not buy high-yield. Up to half can be invested in non-sterling issues and currencies, but this “would be used only if the pound collapses or it is shown that Gordon Brown has got his figures wrong”.

There is an annual management fee of 0.75% and a performance fee of 20% if the fund’s return exceeds three-month Libor plus 2% in a calendar year. If it underperforms in one year, it has to make up the difference as well as the usual target in the next year to gain the performance fee.

The minimum investment in the fund, which can be put into Isas or used for Pep transfers, is £10,000.