M&G Investments is launching an inflation-linked corporate bond fund next week, which will be jointly managed by Jim Leaviss, head of retail fixed interest, and Ben Lord. 

The company believes the fund, which it says is the corporate bond equivalent of an index-linked gilt fund, is the first of its type.

The M&G UK Inflation Linked Corporate Bond Fund will launch on 16 September. It will invest in corporate bonds that should perform well when inflation is high or rising and its return is expected to be similar to the consumer prices index, over the medium to long term. Inflation is currently 3.1 per cent, as measured by the CPI.

Leaviss (pictured) says although he expects the UK will continue to be in a disinflationary environment for some time and interest rates will remain low, ‘some investors do worry about the resurgence of inflation, partly because no one fully understands the impact on inflation of record low interest rates and quantitative easing’.

So M&G has designed a fund that will ‘allow investors to have exposure to credit yet still protect their returns if high or rising inflation returns to the UK economy’.

The fund’s investments will include inflation-linked corporate bonds issued by blue-chip companies, floating rate notes (extremely short-term bonds linked to money market rates that are issued by banks), and government securities and derivatives whose returns behave in the same way as inflation-linked corporate bonds.

Leaviss expects the UK’s relatively small inflation-linked corporate bond market to grow from its current size of £11 billion, particularly if high inflation returns.

Private investors can already buy inflation-protected bonds from companies such as Tesco or National Grid, but Leaviss says choice is limited.

‘This new fund, which I believe is genuinely innovative, will enable retail investors to gain access to a market that is in its infancy,’ he says.

The fund is allowed in stocks and shares Isas. The annual management fee is 1 per cent and the initial fee is 3 per cent. The minimum initial investment is £500 for lump sums and £10 for regular monthly contributions.

The appointment of Leaviss to the new fund means that he will step down as manager of the £1 billion M&G High Yield Corporate Bond Fund.

Stefan Isaacs, who joined the M&G fixed income team in 2001 and manages the M&G European Corporate Bond Fund and the M&G European High Yield Bond Fund, will take over managing M&G High Yield Corporate Bond. 

Leaviss will become the deputy fund manager on the M&G High Yield Corporate Bond Fund.