G Fund Global Inflation Short Duration
31 May 2022
- At Groupama AM, we believe that inflation will remain high in the coming years.
- We also consider that the fixed income markets have underestimated the inflation levels that should be expected over the next few years.
- G Fund Global Inflation Short Duration is an appropriate response in the current context, providing a hedge against inflation upside surprises with a limited duration risk.
- In terms of performance, the fund has successfully achieved its objective, with positive absolute and relative performance since the beginning of the year.
- The fund’s assets under management have grown rapidly since the introduction of this new investment strategy.
Notre conviction : l’inflation restera plus haute qu’anticipée par le marché
- We envisage inflation stabilizing at between 3 and 5% for the next few years
While 2022 has already laid down its marker as the year of the return of inflation in the developed countries, we at Groupama Asset Management believe that a rapid slowing of inflation to the 2% level targeted by the main central banks will be difficult to achieve.
In April 2022, year-on-year inflation indices stood at 8.3% in the United States and 7.5% in Europe compared, levels not witnessed for 40 years across the Atlantic and never seen since the creation of the Eurozone. In May, European inflation is even expected to rise to close to the US level. These levels are forecast to remain at least until the fourth quarter of 2022.
Once the peak is past, the question of the level at which inflation will land remains. Whereas the market is positioning itself for a rapid return to levels below 4% in the United States and 3% in the Eurozone by 2023, our own economic analysts predict that inflation will remain structurally higher in the coming years than during the pre-Covid period.
The combination of short-term factors (persistent uncertainties surrounding commodity prices and supply chain bottlenecks) and medium-term factors (demand continuing to outstrip supply and triggering of a price/wage spiral) leads us to estimate that inflation will take time to come down over the next few years both in Europe and the United States. Additionally, long-term factors, such as the need for countries to improve their strategic independence or to accelerate the environmental transition, financed by a globally more accommodative budget policy, prompt us to consider that inflation will be structurally positioned in a range of 3 to 5% over the next few years.
In this context, we estimate that the fixed income market is not always fully taking this new paradigm into account in its anticipation that inflation will descend to close to the targets of the FED and ECB by as early as next year (see graph below).
- Opportunity in exposure to inflation-linked bonds
So, we feel that this is still a good time for investors to diversify their fixed-income portfolio with short term maturity inflation-linked bonds. These products enable investors to profit from inflation above market forecasts while limiting the duration risk that is painful during rising interest rate markets.
Performance of G Fund Global Inflation Short Duration
- Absolute performance
On the strength of more than 20 years of experience on the inflation-linked bonds market, we took the opportunistic step of launching G Fund – Global Inflation Short Duration on 31 December 2021: this fund invests in inflation-linked bonds with short-term maturities, with the objective of generating returns higher than its benchmark, the Bloomberg World Government Inflation Linked Bonds 1-5 years Hedged in Euros over the recommended investment horizon. Since the beginning of the year, this strategy has offered positive performance in an environment where the whole fixed income universe is suffering.
As is illustrated in the graph below, short term inflation-linked bonds have benefited from an inflation carry that exceeds the negative effect of duration, in a context of sharper than expected increases in interest rates and inflation. During this period, nominal bond indices have suffered from the rise in interest rates and credit spreads
- Relative performance
Since the beginning of the year, as on 27 May 2022, the active portfolio management style has succeeded in making the difference compared to its investment universe: the fund has a net YTD performance of 1.27% (share class I-C , LU1717592346), compared to 0.60% for its benchmark.
The main risks associated with the fund are concentration risk, interest rate risk, credit risk, derivative instrument risk and liquidity risk.
Since the beginning of the year, we had adopted a defensive positioning on US real interest rates, which we have diversified to Europe. This is because we consider that the recent declarations of the ECB will enable euro zone real interest rates to catch up.
We favour a curve flattening positioning of breakeven inflation. In the current context, inflationary pressures are boosting the short-term segments of the curve at a time when central bankers are expected to continue toughening their tone, weighing down on the longer-term segments of the curves. We will maintain our stance as buyers of breakeven inflation in Europe on the intermediate segments.
The investors’ appetite for a hedge against further rises in anticipated inflation has remained undiminished in recent months, as shown, for example, in the rapid increase in our fund’s assets under management.
This document is not intended for “non-professional” European Union investors, as defined in “MiFID” (EU Directive 2004/39/EC dated 21 April 2004) or any other local regulation. Similarly, in Switzerland, this document is not intended for investors not classified as “qualified investors” under the applicable legislation. As a general rule, this document must not be transmitted to private clients or individuals as defined in any legislation, nor to “US Persons”.
This document contains information concerning G FUND – GLOBAL INFLATION SHORT DURATION, a compartment of G Fund (also referred to as “the SICAV”), a Luxembourg-based undertaking for collective investment in transferable securities (UCITS), covered by part I of the Law dated 20 December 2002 and constituted in the form of a “SICAV”(Société d’Investissement à Capital Variable – a European publicly traded investment company structure for open-ended funds). The SICAV is registered with the Luxembourg Trade and Companies Register under number B157527. Its registered office address is 5, allée Scheffer, L-2520 Luxembourg. G Fund was authorized for trading by the Luxembourg financial authority CSSF (“Commission de Surveillance du Secteur Financier”).
Investors are advised that not all compartments of the SICAV are necessarily registered, authorized for commercialization or accessible to all investors in all jurisdictions. Before subscribing to a compartment, the client must take due note of the complete prospectus of the SICAV and of its latest annual and half-yearly reports and its articles of association. These documents are available free of charge at the registered office of the SICAV or at the registered office of the authorized representative accredited by the competent authority in each jurisdiction concerned.
Investment in the compartments of the SICAV involve risks. Investors must fully inform themselves of these risks before any subscription and must make sure that they have understood the present document. We recommend that all potential investors contact an advisor to determine whether this investment is suited to their profile.
The performance of a compartment is not guaranteed but can vary both upwards and downwards. The past performance of a compartment is not a reliable indicator of the future performance of the same compartment. Performance is quoted excluding the costs and commissions charged for subscription/redemption.
This document is not an investment recommendation. Similarly, this document does not constitute an offer of purchase or request to sell in countries where the compartments of the open-ended fund are not authorized to be traded or where any such offer or request would be illegal.
The commercial teams of Groupama Asset Management, the G FUND management company, are at your service if you wish a personal financial recommendation.
Published by Groupama Asset Management – Registered office: 25 rue de la ville l’Evêque, 75008 Paris – Website: www.groupama-am.com