) -- John Hendricks, manager of the

Hartford Inflation Plus Fund

(HIPAX) - Get Report

, says investors should hold Treasury inflation-protected securities, or TIPS, in case policymakers can't control inflation.

The fund has risen 19% in the past year, better than 76% of its peers. It has returned 6.8% annually, on average, during the past three years, better than 89% of its rivals in the inflation-protection bond category.

Welcome to's

Fund Manager Five Spot, where America's top mutual fund managers give their best views on fixed income and the economy in five questions.

What is your view on inflation?

There appears to be growing disagreement within the Federal Reserve about the future path of monetary policy. Fed governors are acutely aware of the potential for overly expansive fiscal and monetary policy to translate into higher inflation in the future. If, for example, the dollar continues to decline in value, it may complicate the Fed's ability to maintain low interest rates and simultaneously prevent inflation expectations from rising.

In the near term, the combination of rising unemployment, falling wages and global slack will likely keep inflation in check. The tendency of policymakers, both monetary and fiscal, to overstay their welcome raises the risk of higher inflation, particularly if growth trends surprise to the upside globally.

How do TIPS work?

TIPS are issued and backed by the full faith and credit of the U.S. government. These securities have the highest credit-quality ratings issued. They are designed to provide investors with a "certain" real return. This is accomplished by adjusting the principal of TIPS for inflation. The adjustment is based on movements in the Consumer Price Index, which is a broad inflation index. Another attractive feature of TIPS is that at maturity, investors receive the adjusted principal or the original principal, whichever is greater.

What are the benefits for accessing this asset class through an actively managed mutual fund?

Mutual funds that invest in TIPS are one way to access the asset class. We believe that an actively managed fund allows us to manage interest-rate risk. In addition, we seek to generate additional performance by investing in other asset classes, such as nominal Treasuries, while still maintaining a high allocation to TIPS.

Where are you seeing the best value along the curve?

Active management allows us to take advantage of steepening or flattening yield curve trends. Real yields on short-maturity TIPS are historically low. In fact, real yields are actually negative at the moment for some short TIPS issues. Given our outlook on the near-term prospects for inflation and the recent steepening of the curve, we see greater value further out on the curve at this time.

What is your outlook for TIPS?

Our greatest concern going forward is the absolute level of real yields. Real yields across the board are historically low. The level is worrisome when considered in the context of a global economy that is recovering more quickly than expected and central banks that are committed to exceptionally low interest rates. When the Fed decides to reverse course, the move will not likely be incremental as it has been in the past. The Fed recently referenced three factors for keeping rates low. No surprise, two of the three factors were about inflation. This is something we continue to monitor very closely. With that said, we still believe that an allocation to the TIPS asset class may help investors mitigate long-term inflation risk as well as diversify a portfolio.

-- Reported by Gregg Greenberg in New York


Before joining, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.