In an environment marked by the return of long-term inflation, at the end of 2021 Groupama Asset Management launched a new fund, G Fund- Global Inflation Short Duration, to protect investors against inflation while limiting the risk of a loss of capital due to the rise in interest rates.
It is now impossible to deny that the return of inflation is a lasting phenomenon and no longer transitory. A new inflation regime is beginning, bringing with it an adjustment of the financial markets, especially the fixed income markets. This return of inflation is due mainly to short-term factors, such as the increase in commodity prices (oil, gas and agricultural products) and supply chain bottlenecks caused by the health crisis. However, these situational price rises are compounded by factors that are more cyclical in nature. Expansive budget policies and massive investment programmes were implemented in 2020 to counter the effects of the pandemic, and they are putting further pressure on prices, while wage increases – as can already be seen in the United States – are having a spiralling effect (price/wage spiral). In addition, there are longer-term factors that could potentially lead to inflation : for example, the energy transition will require high-spending policies, involving a change of economic model in a context of limited resources.
In this new environment of long-term inflation, investors will need specially adapted investment solutions to confront the new paradigm. At Groupama AM, inflation is nothing new, given that the first French government bond (OAT) indexed to inflation dates back to September 1998. Other thematic funds were launched during the years that followed. Groupama Index Inflation Euro in 2003 and Groupama Inflation Monde in 2006. However, while the current offering is mainly made up of long-duration products, the aim of Groupama AM is with G Fund – Global Inflation Short Duration to offer a product that protects investors from inflation while reducing their risk of capital loss in the current context of rising interest rates.
For example, the management team responsible for the fund is in permanent contact with the economic research team to determine the inflation forecasts at each maturity date and in each geographic zone. These anticipations are then compared and analyzed against consensus market opinions to identify any opportunities. Today, an inflation-linked portfolio is roughly 2/3 exposed to the American market, while the remainder is represented by Europe and some other issuing countries. Although inflation in the United States today is higher than elsewhere (8% v 7% annualized rate, in March, in the Eurozone, according to the latest figures from the International Labour Office), the retention of American securities in a portfolio still offers advantages that should be taken into account in the current context. To reach the objective of short duration, the fund also limits its selection to bond issues with a maximum duration of five years. On average, the duration of the bonds in the portfolio is three years.
Resurgence of volatility – stimulating for asset managers, source of opportunity for investors
The preference for short durations offers two key advantages: first, as described above, it limits the risk of capital loss when interest rates rise. Second, it optimizes the gain that investors obtain from inflation-linking. The current reflationary context, combined with the normalization of monetary policies, will probably cause a continued rise in interest rates, while real interest rates remain at historically very low levels.
The protection thus provided is essential to investors, who must adapt to a particularly fast-changing and complex economic and geopolitical environment. Moreover, this increase in volatility, which is impacting financial assets during this period of monetary normalization, is generating investment conditions that are particularly exciting for the asst managers able to seize the opportunities that emerge.