Fixed Income

093 | Inflation-proofing bond portfolios

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  • Ben Lord, Fund Manager, M&G Inflation Linked Corporate Bond Fund

Learning outcomes:

  1. How inflation impacts on fixed income returns
  2. How breakdown rates operate between conventional and index-linked gilts
  3. How managing duration can protect a bond portfolio


Fixed Income
Learning outcomes: 1. How inflation impacts on fixed income returns 2. How breakdown rates operate between conventional and index-linked gilts 3. How managing duration can protect a bond portfolio BEN LORD: The jury is still out. My opinion is very much yes. Because I think we are, it’s likely that we’ve seen the end of the unrelenting fall in inflation: 10 years plus, maybe 30 years of falling inflation. We had zero inflation almost everywhere around the world in 2016, and we’re off the zero bound, inflation is back at if not above target, broadly around the world. And we’ve seen in my opinion interest rates hit their lows and yields hit their lows and I’m quite convinced of that. If you agree with those things and you think there’s a decent chance that we have seen the bottom for inflation and the lows in yields then now is absolutely the time to be thinking about moving some of your old long-dated nominal bond holdings into shorter-dated variable rate and inflation-linked bonds. So that’s very much my view, but it’s still a big debate. As we sit here at the beginning of 2017, we’ve got not just the oil price moves that have happened over the course of the last year, but we have the added impact of the weakness of the pound. The weakness of the pound is interesting from a UK-perspective because it’s longer dated. It takes longer to work its way through the economy and through the inflation numbers than a pure oil price effect. Companies have hedges in for different amounts of time. You have second order impacts that some of which happen quickly, some of which take longer to occur. So ultimately my opinion is we’ve seen the lows in yields for this cycle and we are now firmly off the zero percent inflation across the world. And so from where I’m sitting it’s absolutely the right time to be moving some of your portfolio away from traditional, nominal, long-dated fixed income product and towards variable rate and inflation linked. PRESENTER: What happened to this great fear of deflation, the idea that the West was going to go or likely to go the way of Japan, which has been a really strong sort of backdrop thought over the last few years? BEN LORD: It has and frankly it hasn’t yet been put totally to bed. As I say 2016 was characterised by frankly almost zero rates of inflation around the world. Starting with oil and then it took, it got into the psychology of investors and consumers, very low wage growth, so you’ve got very low levels of demand. We’re now back at 2% or so in inflation terms in the first half of 2017. It looks like we’re going higher. So now why are we here? Well at the moment it’s because of the base effects from oil. Oil was at $35 a barrel this time last year in 2016 and it’s now at $50 a barrel, give or take it’ll be between 50 and $60 a barrel over the course of 2017. Now, if oil stays there, then in 12 months’ time you’re going to see the base effects come out. And that’s why I say the jury is still out. You can’t yet say that the fears of deflation emanating from Japan are exemplified in Japan which was driven by a rapidly ageing demographic, that was the major factor. And that’s now happening elsewhere around the world. And so if the oil base effect comes out of the numbers in 2018 and none of the recovery in inflation has any second order impact then the debate about whether we’re still at risk of seeing deflation as opposed to a more sustainable inflation is going to resurface. I have a view but I can’t yet say that the deflation fear should be put to bed. PRESENTER: What about sterling weakness? Does that mean we’re going to be importing a lot of inflation into the UK? BEN LORD: Well that’s absolutely the most important driver of inflation in the UK in 2017. The oil base effects are going to see inflation return to around target in the early parts of the year, but thereafter in the UK the most important driver is going to be sterling, which has fallen on a trade weighted basis by 20-25%. That clearly shows through in a greater move in the price of oil, but we’re an import-driven economy, and the currency effects and the higher import costs are going to be, they’re a longer term force than just an oil base effect that will come out of the numbers if oil prices don’t move over the course of the next 12 months. The currency effect tends to take longer to come through. So you’re talking more two or three years where you will see higher imported inflation costs, and that’s absolutely why most of the forecasts that I’m seeing for 2017 and ’18 are going to have RPI reaching around 4% and CPI reaching just above 3%. PRESENTER: And what’s the Bank of England’s take on all this? BEN LORD: Well I guess there are two ways of answering that. The first is that the Bank of England through Kristin Forbes updated their work on what the pass through is from a move in sterling into the inflation numbers, and that was updated March 2016. And their latest numbers suggest that the coefficient between a move in the currency and inflation is 20-30%. Now what does that mean, if you’ve had 20% for in trade weighted sterling, then you’re likely to see 4 to 6% higher CPI, so a pass through of 20 to 30%. In terms of what the Bank of England may be thinking policy-wise, Mark Carney and other members of the MPC have already been preparing the bond markets for an overshoot in inflation. An overshoot in inflation almost entirely driven by the weakening pound, and the indications that they have made so far to this point are they will be looking through an import-driven, sterling-driven overshoot to inflation, because they are worried about downside risks to the economy from Brexit and what that may mean for joblessness and so on in a downside scenario from that. So quite clearly their work suggests that you’re going to see higher inflation and in fact above target inflation probably involving some letters from the Governor to the Chancellor of the Exchequer explaining why, but they’re also preparing the bond market for these overshoots and already saying that they are not going to respond hawkishly at this point in time. PRESENTER: And what’s the attitude of the US authorities because that’s the most important economy globally? BEN LORD: The US made a very significant policy move, a change to their inflation targeting mandate in 2016, and I don’t think it got anything like the coverage that it deserved, but Janet Yellen in an official speech - and that makes it policy - said that the Fed’s approach to inflation targeting is now going to be symmetric. Now what that means is she was talking at a period after which they had been low inflation by almost a percentage point a year for the proceeding four years. As we all know, since the old price collapsed and so on and so forth, inflation numbers have been very low. So she was talking at a point in which they’d had four years of inflation closer to 1% than to 2% which is their target. She then said that their inflation targeting mandate would be symmetric i.e. we can now allow for an overshoot in inflation of around 1% a year for the next four years or 4% over one year, so as to play catch up over the course of a cycle. That’s a big change and one that I think deserves more coverage and discussion than it’s received so far. PRESENTER: Why are people so happy to do this? Is this because the debt piles or government debt piles are so big they just need to inflate that debt away over time? BEN LORD: That’s certainly one argument and must be high up in a list of considerations. Another is that the essential bankers want nominal GDP growth. They just want an economy that’s a bit hotter for a period of time, where you can get wage growth, where you can see an economy move gear, move up a gear from this very low inflation low growth environment that we’d been in. I myself am not so sure it’s simply a case of wanting to inflate the debt burden away, and I’ll explain why. Governments particularly in the US and in the UK have a significant amount of liabilities, of benefits that they must pay that are linked to inflation. So if they go and manufacture or succeed in generating a period of higher inflation than we’ve seen in the recent past, they’ve got a large pile of liabilities that rise with inflation meaning that actually for you to benefit significantly or to benefit maximally from a pickup in inflation you want all of your liabilities to be nominal. And that’s not the case. And a good example of that in the UK is the triple lock to state pensions. For instance where the government’s extended to 2020 the triple lock where you get paid the highest of inflation average wages, or 2½%. So there are all kinds of liabilities and obligations these governments have that are explicitly linked to inflation that actually mean that the benefits on the debt burden of a rise in inflation aren’t a simple pass through, aren’t a simple win. It’s a bit more complicated than that. PRESENTER: Given this backdrop, can you tell us in a bit more detail what that means for fixed income investors? BEN LORD: Well I think that the beyond all doubt is that the 30 years really of falling inflation and so wanting to buy long-dated fixed rate nominal bonds - remember as I’ve said, as inflation falls your real yield on a nominal bond is rising in that environment - I think we’re at the end of that. I can’t say that with hundred percent conviction, but I think bondholders and investors need to be thinking very carefully about diversifying away from that one-directional trade that we’ve been in for the last 10 or maybe even 30 years. If you think that inflation is coming back and if you think that the economies are improving, and that’s very much where I think the investment community feels at the beginning of 2017 is that the global economy particularly the US economy is in good shape, is growing better, is investing better, has more confidence, if that’s the case then you’re going to get to the point where you’ll get some inflation back, and you’ll probably get central Bankers coming out and responding with higher interest rates. And if that’s the case then you don’t want to have very long-dated fixed rate product. You want to be bringing your exposure to interest rates shorter, having less duration, less interest rate risk in your portfolios. Now, if we are at the beginning of a more sustained inflation where oil base effects and then the weakness of the pound leading to higher imported inflation feed through and have second order impacts, they feed through into wages, they feed through into some form of demand, if that’s the case, then you definitely want to make sure that you’re thinking about a more sustainable inflation pathway going forward. You want to have more variable rate securities, more floating rate notes, more inflation-linked bonds, less interest rate exposure, and that’s a very significant move to bonds, to portfolios from where we’d been for the last 10 years or more. PRESENTER: Should you just have less in bonds full stop; buy completely different asset classes? BEN LORD: If we’re at the point where inflation’s returning, central banks are becoming more hawkish, then yes, one should be reducing one’s bond holdings. The counterfactual to that would be that we are at a point at which the world is aging and famously as you approach retirement you need to have less equity risk and more fixed income risk and in retirement you want to be living off as much of a fixed income as possible without risking that pension pot that you’ve put together. So there is this global force that still needs to own fixed income. PRESENTER: Well picking up because you said earlier about Japan’s demographics or one of the reasons that it had deflation. Are the demographics in somewhere like the UK or the US ever going to reach Japanese proportions? Are we just not quite as far down the road as them or are we in a fundamentally different state? BEN LORD: I think the difference is probably that Japan went through its ageing on its own. And it’s located very close to China, the largest exporter in the world. So as Japan aged and you had people retiring and starting the drawdown on their pensions and produce less and consume more, they’re located close to China where there was just this huge arrival of a cheap workforce. The difference this time is that you’ve got Europe, the UK, the US, even other parts of the world, all ageing at the same time, and that I think makes the ability for the ageing and the retirement of a significant portion of the demographic to be less deflationary than it was in Japan’s case. If you think about it from a different standpoint, a demographic pyramid is, what you want is to have, well retired people and the young who are at school or still in education are the only inflationary parts of the population. The deflationary part of the population is the workforce. And as a large portion of the workforce retire and move from the productive to the unproductive part of the workforce, all else remaining equal you’ve got more people consuming and not producing and less people producing. That should at least theoretically on those terms lead to higher prices. And given that the ageing of the global population is now global force, it’s not going to be so easy to exploit globalisation and use, tap into cheaper labour markets in different parts of the world to supply you with the goods and services that you need. And that’s what I think Japan did that is going to be different this time. PRESENTER: Thank you for that. We’ve talked about inflation several times but do you mind just giving us a bit of a run through of what generates inflation, where does it come from? BEN LORD: Well inflation is the rise in the generalised cost of living. That’s the first principle of it. It includes goods and services. And the ONS in the UK’s case is a body that works very hard to try to put together a representative basket of goods and services that best suits the average person in the UK’s spending habits. And then they have a very unenviable task of each and every single month going and recording the prices of those goods and services and making all sorts of adjustments for quantity and quality and coming up with a number that indicates what the rise or the fall in the cost of living as specified by the index that we’re talking about whether it’s CPI or RPI has done over the course of that month or that year. PRESENTER: And what’s the different between demand-pull inflation and supply-side inflation? BEN LORD: That’s a very relevant question I think for 2017. Demand-pull inflation is probably the type of inflation that we saw in the 1970s or ‘80s. You had - the outlook for demand was improving. More people were finding jobs, those jobs were giving you significant wage growth, significantly above the generalised level of inflation so you’re getting positive real wage growth and they were having the confidence to go out and to spend and to demand more goods and services with their wages and with disposable income. The demand-pull is the benign positive type of inflation environment. Cost-push is different. And I fear particularly in the UK where effectively the inflation that we’re seeing is coming solely from the base effects of oil, oil being higher this year than it was last year, and the weakness in the pound, and us having to spend more pounds to buy up the same amount of imports. Those two things really are pure costs being pushed onto the UK consumer. And that is not the best kind of inflation. That means that people have got less disposable income to spend left after they’ve bought the goods and services they were buying this time a year ago. It effectively acts as tax. Unless wages are growing faster than the level of inflation, and actually in the UK 2017 appears to be set to be a year where inflation once again overtakes average wage growth, which means that it does become that cost-push. That also has implications for how equities or other asset classes may behave in the inflation environment. In demand-pull inflation, companies may well have the ability to increase their prices by more than their costs – which would be good for capital expenditure, good for shareholder returns, good for wages. It strikes me that in an environment where companies are being forced to spend more to make per unit of good or service they’re not going to have the same ability to increase their prices because the consumer has left less disposable income that it had before. PRESENTER: So if we’ve got the wrong kind of inflation at the moment, what’s the sort of medium three to five-year implications of that for an economy and fixed income? BEN LORD: Well, the question, it all comes down to what the second order impacts of this inflation experience that we have entered and are going to go through for the next two years have. Can the economy generate the confidence and can companies generate the financial capability to increase wages? That’s the key question in the UK. In the US, it appears almost a certainty that at the beginning of 2017 the US worker is going to get a positive real wage. And probably this is a trend that - wage growth cycles tend to happen for three to five years, not for a few months - unemployment is less than 5%, wage growth is on the up already, and it looks like companies have enough strength to continue that into the end of 2017 and into ’18. In the UK, we don’t, I don’t have the same level of confidence that that’s the case and at the moment wage growth is pretty stagnant. Companies are having to pay 20-25% more in sterling terms to buy their raw input for making their products and their services than they were a year ago and so they are being very careful about where that money goes, particularly wages. PRESENTER: There’s a handful of measures of inflation in the UK. Could you run us through the difference between RPI and this new measure CPIH? BEN LORD: Yes, well I guess you’ve just implied there are three measure of inflation at this point in time. There’s the retail prices index, which I think is dated back to the Great War. That is, as a bond investor, the most important indexation, index that we have, inflation index that we have, because that is the index that we’re paid for in bonds, UK gilts and other index-linked bonds in the UK, pay inflation as determined by RPI. Then we had CPI, which was a more modern, it’s used globally. Some would say a better measure; it’s a different measure of inflation. And the most significant different between RPI and CPI is that RPI is calculated on a mathematical average, on an arithmetic mean, so if you’ve got three items that have risen by 3, 4 and 5% over the course of a year, 3% plus 4% plus 5% divided by three. CPI is calculated on a geometric mean. So 1.03 times 1.04 times 1.05. The geometric mean gives a lower number, so there is this thing called the formula effect. Naturally therefore RPI is going to be a bit higher than CPI. And what we’re talking about here is the wedge. The wedge is the difference between RPI that we’re compensated for in UK index-linked bonds and CPI which strangely is the inflation rate that the Bank of England manages the economy to. The Bank of England wants CPI to be around 2%. The wedge is the difference between the two and over the very long term is around one percentage point. So if CPI is a 2%, RPI is about 3%. Now CPIH is the latest one, because the second biggest difference between CPI and RPI was that RPI contains an element of housing – particularly poignant in the UK when it’s such a major asset over an individual’s life. Now, it’s in two forms in RPI. You have about 15% of RPI is house price depreciation: what house prices are doing. And the second, which is smaller, probably 3% of RPI is mortgage interest payments. Which makes sense, how much are your mortgage payments and mortgage interest rates moving over the course of a month in your consumption basket. CPI didn’t include any housing. And that’s a problem and is one that it stands out. In Europe and the US they have found a way of including some component of housing. It’s a flaw because of the importance of housing in the UK. ONS has long known it, policymakers have long known that it’s a flaw, so CPIH, the H is for housing and it incorporates an element of housing. It incorporates an element of housing. It makes it more globally comparable. It’s more relevant. And what it tries to do is, about 15 to 20% of CPIH is an owner’s equivalent rent. So if you live in and own your own home, they’ve tried to calculate how much it would cost you to rent that home. Remember assets shouldn’t really be involved in consumption indices, because you’re not really consuming it over the course of a month; whereas if you’re renting that’s probably the most important consumption item in your basket. So it’s an attempt to modernise CPI, to make it more globally comparable and to bring in a very important category of spending to most people. PRESENTER: And this is now what the Bank of England’s targeting, is it CPIH rather than CPI? BEN LORD: This is now the national statistics. So CPI is over the course of the next few years going to be forgotten about and this will be adopted out. This is what they’re going to be trying to manage to around 2%. PRESENTER: Well you’ve mentioned index-linked bonds there; if we are in a period of higher inflation, is our index-linked bonds the right kind of investment to be making? BEN LORD: That’s a great question. In terms of, if you’re worried about a rise in the cost of living as defined by RPI, then the only asset you can get that is going to perfectly compensate you for a movement in RPI is going to be an RPI-linked bond. It’s going to be an index-linked bond. However, we find ourselves in an environment, and we have been here for 10 years, where nominal interest rates have been cut, nominal yields are incredibly low and inflation expectations are remaining pretty solid. People still, the markets still and consumers as well in surveys still believe inflation is going to come out at somewhere around the target for the next five and 50 years. So, if you have very low nominal yields, very low interest rates and people still expecting inflation to return, you end up in a situation, as we are today and as we’ve been in for 10 years, where you have very low, even lower and in our case negative real yields. So when can you get inflation protection from index-linked government bonds? Well you want to be buying an index-linked government bond on a real yield of zero. Not to be on a positive real yield or a negative real yield, and that way if you hold that bond to maturity you are going to get realised RPI each and every year over its life. We’re not in that environment. And it’s perfectly rational because you have near zero interest rates. You have had the Bank of England buying and supporting the nominal gilt market and so supporting nominal yields low and flat yield curves. And because people still expect inflation to come out around trend, you’ve got negative real yields. But if you go and buy a 50-year index-linked gilt today, you’re buying it on a negative real yield of about 1¾%. You’re buying it nearly 2% negative. So there is no way you can get inflation protection even from buying the longest-dated index-linked gilt that we have. That is also a problem because of how long-dated the inflation-linked bond market has become. The average index-linked gilt has a duration of 23 years, which is about twice as long as the average gilt. Now, those two things taken together - more interest rate risk and not getting inflation protection because you’re buying them on negative real yields - make it a pretty dangerous place to be actually. There are things you can do to get around it. Personally, I don’t want to be taking very much interest rate risk at the moment so I come shorter dated and then there are other things one might do to try and boost that negative real yield and get back to a place where you’re achieving something much closer to CPI. PRESENTER: Who are the natural buyers of this long-dated index-linked paper? BEN LORD: The long-dated market is almost entirely dominated by pension funds. The sort of 30-50 apart is almost entirely dominated by pension funds. We have very large pension liabilities in the country. You know, large companies who have employed millions of people who are in pension schemes, and they constantly at the moment need to be funding these liabilities, and the best way to do that or probably the biggest way to do that is through buying long-dated index-linked government bonds. PRESENTER: So there’s a big group of powerful natural buyers that are keeping those prices very high? BEN LORD: Yes, and they’re being regulated too. Regulators are quite rightly in some ways saying you’ve got to match these liabilities. You’ve got to pay into your pension funds, make sure that you’re as close to fully funded status as you can be. That makes a lot of sense. Otherwise you end up in a situation like we nearly did with the BHS story in 2016. There is another argument that says at the moment companies are putting too much of their net worth into their pension schemes. And that means that they’re not giving the wage rises, they’re not investing in their plants and their equipment that would improve productivity and give the whole economy a boost. So there’s an interest debate to be had. But at the moment the regulator is forcing a lot of resource into pension schemes and so they are buying long-dated index-linked gilts at a serious clip. PRESENTER: Well, if index-linked gilts don’t quite hedge your inflation risk, do they still look a better prospect than conventional gilts? BEN LORD: Well again we come back to whether we’re in a sustainable inflation. Whether we’re out of this very low nominal yields and with the Bank of England supporting nominal yields there, or whether we’re at a turning point where inflation is sustainably heading up, where you’ve got central banks coming out and actually hiking interest rates, yield curves correcting. So again that is the biggest question in fixed income for the next few years, I would suggest. For me, I wouldn’t want to be taking long-dated risk in any form, and so the most objective way I can answer that would be to say if I don’t like owning interest rate risk because I’m worried that yields are too low and they’re going to rise, then mathematically I’m going to prefer nominal long-dated over index-linked, because index-linked bonds have longer duration. You have more capital at risk. And let me put a number on that. If you take the 2068 gilt, it has about 30 years’ interest rate risk, 25 to 30 years’ interest rate risk. If you buy the 2068 index-linked gilt, you’re taking 50 years’ interest rate risk. So if we get a parallel shift in the yield curves of 1% and the inflation expectations don’t move, you’ve lost 25 to 30% on your gilt, but you’ve lost 50% on your index-linked gilt, and that’s how I would answer that question that I don’t want to own too much interest rate risk here. PRESENTER: Now, we’ve been talking in this discussion about conventional gilts and index-linked gilts, how do you or is there a simple way of working out whether you want to be in one or the other, how do you do the calculations? BEN LORD: There is. What we’re talking about here is the breakeven. Now the breakeven is, mathematically it’s the difference between the nominal government bond yield and the index-linked government bond yield. What does that mean? What is the breakeven? That is the fixed income market’s expectation for the average rate of inflation. And how does one invest according to that? If you think that inflation is going to be higher on average than the breakeven, you want to be buying index-linked bonds rather than nominal bonds. And if you think that inflation is going to be lower on average over the course of that investment’s life, then you’ll want to be buying nominal, not index-linked. It’s a relative valuation metric but it’s the key one that we use on a day-to-day basis in terms of working out our preference as to whether to buy nominals or real yields. But even if index-linked may seem to me to be much better relative value than nominals, it doesn’t guarantee you an absolute return in any sense. PRESENTER: Could you give us a very simple worked example, just to put some numbers around that? BEN LORD: Absolutely, so where we are at the beginning of 2017, you’ve got 10-year gilt yields at around 1¼% and you’ve got index-linked, 10-year index-linked yields at around -1¾%. The difference between those, so 1¼% and -1¾% is 3%: 3% is the breakeven. And that means that the bond market is expecting RPI inflation, because UK bonds pay RPI as the inflation compensation index, to be 3% a year for the next 10 years. PRESENTER: But if the future direction of inflation, as you said, it’s quite a sort of binary choice. You know, it’s going up or it’s not. And that’s a bet you don’t want to take. Is there a danger that if you hold fire for now by the time you are confident you know where inflation’s going long term, you’re a bit late to the party? BEN LORD: Definitely, that’s definitely the case. By the time you pick up your paper and it’s on the front page and you think it’s time to be buying inflation protection, the bond market will have already moved to price in a lot of that. The way I would probably answer it is just keeping it very simple. The best time to own nominal bonds, to own fixed rate bonds is when inflation’s falling and interest rates are falling. Well inflation has been at zero. Inflation expectations, some people were worried about deflation, and interest rates are at zero. And I’m almost convinced that we’ve seen the lows in yields and in interest rates. If that’s the case and inflation’s coming off zero, the interest rate cycle is turning, then you want to own variable rate product over fixed rate product. And you want to own some inflation protection. And so just from the 35,000ft view, I absolutely want to make sure that I’m selling some long-dated fixed rate bonds and I’m buying index-linked at this point in time. PRESENTER: So we’ve talked a lot over the course of the last half hour but in summary what should investors do to guard against higher inflation for the next few years with their bond portfolios? BEN LORD: Well, the first thing would be to sell long-dated fixed rate bonds. Don’t own the 2068 gilt and to the same measure don’t own the 2068 index-linked gilt because it has more interest rate risk. I can only speak within the confines of a bond portfolio but reduce some of those long-dated fixed and start buying variable rate bonds. That means some floating rate bonds, which are very important if the central bank, if the monetary policy committee starts hiking interest rates, and buy some short-dated inflation linked bonds. Yes, you’re buying them on a negative real yield, but there are ways. You can take corporate credit risk over the top. So you can buy some short-dated index linked gilts and take some exposure to companies. That boosts your return over and above that negative real yield. But still have that exposure to RPI. And perhaps the best way to think about it is in an extreme example. Here we are and you’ve got the choice between buying a gilt on a yield of 2% and an index linked gilt on a yield of -1%. If inflation went to 10%, your gilt has got you a negative real yield of -8%; whereas your index linked gilt has got you 10% minus 1%, 9% money yield. You are much better positioned even with a negative real yield in index linked than you are in nominals, because in nominal bonds, for every increase in inflation your real yield is going down. Yes, you’re going to get a negative real yield if you buy an index-linked gilt. Even at the short end, especially at the short end without too much interest rate risk. But if inflation outcomes do start rising, you’re going to do a lot better than in gilts. And what we’re talking about here is the most important valuation measure that we’ve got in fixed income for deciding between nominal bonds and index-linked bonds, that’s the breakeven. PRESENTER: And you mentioned floating rate paper there, how much of it is there out there for you to buy or is it quite a small asset class? BEN LORD: Floating rate notes, there’s a lot. It’s a liquid market. It’s largely issued by financial institutions and the asset-backed security markets, very high quality, large issue sizes, very well followed, deeply liquid, so it’s a very important place. I think it’s increasingly so if you think that the Bank of England will start hiking rates. But you can find many funds and many bonds out there that are right for you if you’re interested in defending yourself against interest rate risk and rising interest rates. PRESENTER: So in summary are you confident that a bond portfolio can make real returns for investors over the next few years, even if inflation picks up? BEN LORD: Yes, absolutely. If you do the right things and you avoid the banana skins and you avoid just grabbing incremental yield and taking more interest rate risk and you buy some variable rate and you buy some short-dated and you buy some index-linked and so on and so forth, then yes I’m pretty convinced that you will be able to achieve a decent real return. PRESENTER: We have to leave it there, Ben Lord, thank you very much. BEN LORD: Thank you.