„Inflation-linked bonds can make a significant contribution to a well-diversified bond portfolio“

Fund Manager Alexandra Muchna

In an interview with Austria's leading financial portal BÖRSE EXPRESS on the Raiffeisen-Inflationsschutz-Anleihen, which can contribute significantly to a well-diversified bond portfolio.

Börse-Express: What do you think about the outcome of the ECB Council meeting on 9 June and what impact do the decisions of the ECB have on the asset class selected by Raiffeisen-Inflationsschutz-Anleihen?

Alexandra Muchna: The ECB was clearly focused on containing the rising inflation expectations at its last meeting. Accordingly, it can be assumed that real yields will rise until a decline in demand becomes visible.

A year ago, you said in an interview with Der Standard that you didn’t see an inflation problem based on the data at the time. How do you see things based on the current data and how would you assess the key fundamental macro factors whose analysis serves as the basis for the inflation-linked strategies implemented for Raiffeisen-Inflationsschutz-Anleihen?

A series of difficult to predict supply shocks caused inflation to reach new highs. At the same time, demand increased sharply in segments with capacity bottlenecks, while companies used the opportunity to increase their profit margins. Since the spring, however, monetary policy has been noticeably tightened in nearly every economy in order to ensure that these largely one-off adjustments do not result in any second-round effects.

The fund invests primarily in euro-denominated inflation-linked bonds. How exactly does inflation protection work with inflation-linked bonds?

With inflation-linked bonds, the interest payments and redemptions are adjusted to the actual development of inflation. Therefore, inflation-linked bonds can protect investors from an increase in nominal yields caused by rising inflation expectations and inflation risk premiums. If nominal yields decline due to real yields, however, the prices of inflation-linked bonds will also fall.

The fund management also works to optimise the risk-return profile using active strategies. What does risk-return optimisation mean to you and which strategies are currently used in this context in the fund?

We apply a number of uncorrelated active investment strategies aimed at boosting the portfolio’s risk-adjusted return. At the moment, however, the fund only shows a slight difference compared with the benchmark, and nominal bonds are overweighted versus inflation-linked bonds. US bonds are preferred at the expense of Eurozone bonds.

How do you explain the fact that French and Italian inflation-linked bonds are currently overweighted against German and particularly US issues in the fund?

The fund focuses on Eurozone government bonds, as these issues are better suited to protect European consumers against local inflation because they are indexed to the Eurozone Harmonised Index of Consumer Prices. Italy and France are by far the biggest and most liquid inflation-linked markets in the Eurozone.

Which overweight and underweight positions with regard to the rating structure of the inflation-linked bonds are currently being held in the fund and why?

The fund is currently moderately overweighted in Spanish issues versus German Bunds, primarily due to the better growth prospects in the short term (tourism versus manufacturing).

Raiffeisen-Inflationsschutz-Anleihen is actively managed using the J.P. Morgan Euro Linker Securities Index (ELSI) 1–10Y as the benchmark. How is this index structured in rough terms?

The index consists entirely of Eurozone government bonds, with France accounting for 43%, Italy 27%, Germany 15%, and Spain 13%.

How would you describe the fund’s performance and risk metrics in absolute terms and also in relation to the benchmark?

Inflation-linked bonds have dramatically outperformed nominal bonds since 2021. The increase in inflation last year was seen as temporary by the central bank, and monetary policy remained accommodative in order to bring growth back to the pre-COVID path. This year, there has been a change in the monetary policy stance due to the persistence of inflation. Inflation-linked bonds have suffered price losses just like nominal bonds, albeit to a much lesser degree. The fund has outperformed the benchmark before costs since its launch.

I should invest in Raiffeisen-Inflationsschutz-Anleihen today rather than tomorrow because…

…inflation-linked bonds can make a significant contribution to a well-diversified bond portfolio. In addition, Raiffeisen-Inflationsschutz-Anleihen has relatively low real interest rate risk based on its maturity structure, so the performance is significantly influenced by the inflation payments even over shorter time periods.

Börse-Express, Premium Newsletter as of 29 June 2022

Notes:

Due to the low or negative yields that currently prevail on capital markets, the interest income in the fund is currently – and with high probability in the near future as well – insufficient to cover the running costs. It is not possible to make reliable, long-term forecasts in view of the incalculable factors regarding future market developments. The Fund Regulations of the Raiffeisen InflationLinked Bonds have been approved by the FMA. The Raiffeisen InflationLinked Bonds may invest more than 35 % of the fund's volume in securities/money market instruments of the following issuers: France, Netherlands, Austria, Belgium, Finland, Germany.