Atlantic House launches fixed income fund to profit from rising inflation

investmentweek.co.uk:

Mark Greenwood (pictured) is deputy CIO at Atlantic House Investments

The Dynamic Duration strategy is designed to perform in inflationary and deflationary environments by pivoting between exposure to conventional fixed income and target exposure to inflation itself.

Lead managed by deputy CIO Mark Greenwood said the strategy uses three liquid instruments — government bonds, interest rate swaps and inflation swaps — equally applied between the UK and US markets.

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It tilts its exposure to fixed income and inflation-linked assets based on three signals: inflation trends, real yields (market inflation credibility), and current levels of core inflation relative to central bank policy targets (central bank credibility).

According to the fund house, these three signals provide an estimation of the likelihood of a future increase or decrease in UK and US interest rates and inflation.

In turn, this determines the fund's positioning across fixed income and/or inflation.

For example, using the ‘inflation trend' signal, the fund managers would assess downward trending inflation may lead central banks to cut interest rates, increasing the value of fixed income assets while, conversely, inflation trending up may favour investments in inflation swaps.

Applying the ‘market inflation credibility' signal, a higher real yield on inflation-linked bonds indicates a market expectation of lower inflation increasing the appeal of fixed income. A negative real yield, meanwhile, implies higher inflation which favours inflation swaps.

Finally on ‘central bank credibility', if core inflation is below target, central banks are less likely to increase interest rates making fixed income attractive.