What speaks in favour of this asset class?
ILB’s can contribute an important part, when it comes to preserving the purchasing power and to be protected against an unexpected rise in inflation.
What is the best economic environment?
The best environment is stagflation, this means inflation and falling interest rates.
What is the worst economic environment?
In a rising interest rate environment without inflation, the inflation protection is not effective.
How can this asset class being implemented?
Due to the complexity the use of investment funds is recommended. It is important to make sure, that the indirect costs of the funds chosen are in relation with respect to the added-value of the asset class.
What are the challenges with ILB’s?
Quite often it is difficult to understand the pricing together with a lack of transparency. For the protection against inflation, the investor pays a premium in the form of a lower coupon. The indirect costs of the bond have to be checked before the purchase.
Are those bonds having an interest rate risk?
Yes, ILB’s as well can suffer losses if interest rates rise. They are however diminished by the indexing of the coupons and the nominal value.