Fidelity Offering TIPS to Investors
Fidelity Investments is launching a new bond fund aimed at investors who are concerned about rising inflation.
The new fund will hold U.S. Treasury inflation-protected securities, or TIPS, which were introduced by the federal government in 1997. The bonds' principal is adjusted to rise with inflation; specifically, the principal rises in accordance with the consumer price index.
Fidelity is slightly behind the curve in introducing its TIPS fund, although the timing is sound: The small universe of TIPS funds (Lipper tracks just six such funds) has done very well of late. Pimco's Real Return Fund (PRTNX) PRTNX , the first inflation-protected bond fund, was opened on the day of the initial TIPS auction in 1997 and now has nearly $4 billion in assets. Vanguard's $1.4 billion Inflation Protected Securities fund (VIPSX) VIPSX , the second largest, was introduced in June 2000.
The two funds are also the best-performing of the group. Pimco's actively managed fund has returned 6.3% this year, while Vanguard's index fund gained 6.1%.TIPS have greatly outpaced standard Treasury bonds. The Lehman Brothers TIPS index returned 5.9% in the first five months of 2002, while Lehman's Treasury index has returned just 2.2% in the same period. "TIPS have had a real good run vs. nominal Treasuries and even international inflation-protected bonds," says Bob Greer, Pimco's real-return product manager. "And we don't think the run is over. There's still concern about rising inflation." And it's the concern about inflation that drives TIPS returns -- not necessarily actual inflation. But that concern is justified: After several years of low inflation, most economists predict rising inflation, with the rate expected to be between 3% and 4% in 2003. Right now, the so-called "break-even" rate of inflation -- the point at which there's not much difference to investors whether they purchase traditional government bonds or TIPS -- is 2.2%. In other words, investors who think inflation will rise more than 2.2% in the next few years -- which most economic forecasts predict -- will flock to inflation-protected TIPS. TIPS are a hedge -- they do better than bonds when inflation is rising but less well when deflation occurs. In the case of deflation (defined as a decline in the prices of goods and services, not to be confused with disinflation, which is a slowing down in the rate of price increases), TIPS' principal is protected by the government's guarantee to repay investors at least their original investment.
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