Inflation-linked bonds may help retail investors protect savings

SINGAPORE: While analysts say property and blue-chip stocks are two sound investment classes and remain good hedges against inflation, retail investors who are looking just to protect their savings currently have few choices.

Daryl Liew, head of portfolio management at Reyl Singapore, said: "The really missing ingredient is inflation-linked bonds. Because if you have that, it is something that investors can really park their money in and can be safely assured that over the long-term, their investments, the coupons they get are basically pegged to whatever the inflation rate is."

The Monetary Authority of Singapore said in Parliament on Monday that it is studying the possibility of introducing inflation-linked bonds to help retail investors preserve their savings, in light of near zero interest rates.

And while corporate bonds and government treasuries are available, observers say these are accessible mainly to high net worth individuals. Some high-yielding corporate bonds, for instance, require higher capital and may not be affordable for most retail investors.

Marcus Teo, head of high net-worth channel at HSBC Singapore, said: "I think the reality is that if you look at the 10-year SGS (Singapore Government Securities), the yield is approximately about 1.5 per cent and given that inflation is 5 per cent, it doesn't help much.

"Your purchasing power continues to erode on a yearly basis, so I think retail investors, unfortunately, have limited options, unless they are willing to take higher risk with their portfolio."

Wong Sui Jau, general manager of Fundsupermart, said: "Unfortunately, if you want to set a benchmark of 4 to 5 per cent, the inflation target you want to beat in terms of returns, then you need to go into the higher-risk type of bond funds. These would be your emerging market bond funds and high-yield bond funds."

Such funds offer close to 6 to 7 per cent yield, says Fundsupermart.

In the past quarter, some of these bond funds have also outperformed equities, with yields of up to 10 per cent.

Fundsupermart says that out of over 50 bond funds, it only carries one inflation-linked unit trust -- the Fidelity Global Inflation-Linked Bond Fund -- which has shown positive performance of 2.5 per cent year-to-date, despite its lack of popularity amongst investors.

Analysts say they do not see the introduction of inflation-linked bonds happening soon, citing the need for investor education on the risks and the right infrastructure to make the product available to retail investors in Singapore.

Analysts also warn that hedging against inflation is not just a race towards the highest yield.

"We do caution that you shouldn't just look at the yield because it comes at a price and its associated risks. For any security that gives you a very high headline yield, you should question whether you are comfortable with the risk that you are correspondingly willing to take," Mr Teo said.

With interest rates remaining low and inflation elevated, investors could also consider selective investments in precious metals and currencies to diversify their portfolio.