M&G taps into inflation fears with new bond fund

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Wednesday September 08, 2010 02:17:13 AM GMT

* To use consumer price index as a benchmark

* To invest in blue-chips, floating notes, derivatives

LONDON, Sept 6 (Reuters) - Prudential's fund management arm, M&G, is tapping into fears of resurgent inflation and appetite for bonds with an inflation-linked corporate bond fund, which it says is the first of its kind.

M&G Investments said on Monday its UK Inflation Linked Corporate Bond Fund, aimed at the retail sector, will invest in fixed interest securities "that should perform well when inflation is high or rising." The launch is scheduled for Sept. 16, it said in a statement.

"Put simply, the new fund is the corporate bond equivalent of an index-linked gilt fund. It should protect the value of investors' income and capital over the medium to long term," said Jim Leaviss, head of M&G's retail fixed interest team, who will run the fund with Ben Lord.

The fund launch comes at a time of concern that quantitative easing, central banks' purchase of government bonds to inject cash into global markets after the Lehman Brothers collapse, will trigger a bout of high inflation in the medium term.

Inflation in the UK has exceeded the 2 percent target consistently in the last four years, Leaviss told Reuters, but he still does not expect high inflation in the short term.

"We think there is far too much unemployment, too much overcapacity (for inflation to rise)," he said adding the fund launch was a pre-emptive strike to cope with investor demand. "We are building the fire engines in case there is a fire," he told Reuters.

Investors have also shown appetite for fixed-income investments this summer. The global bond sector was the best-selling asset class in July, with net retail sales of 361 million pounds, and corporate bonds were the second top-selling sub-category, the Investment Management Association (IMA) said on Monday. The UK inflation-linked corporate bond market is worth 11 billion pounds ($16.9 billion) including issuers such as supermarket chain Tesco or utility service National Grid, said M&G, though Leaviss declined to say whether the M&G fund would include these two. Its universe will include inflation-linked corporate bonds issued by blue-chip companies and short-term bonds linked to money-market rates issued by banks, known as floating notes, as well as government securities and derivatives whose returns behave in the same way as inflation-linked corporate bonds. ($1=.6507 Pound) (Reporting by Cecilia Valente; Editing by Will Waterman)

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