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Inflation-indexed funds up
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June 29, 1999: 6:25 a.m. ET
A little-known way to protect your investments from rising inflation
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Most people have probably never heard of inflation-indexed bond funds, but if you think inflation is heading up you might want to consider them, mutual-fund experts say.
Inflation-indexed bonds rise in value based on the rate of the Consumer Price Index, said Eric Jacobson, a bond fund expert and an analyst at fund-tracker Morningstar.
"If you're only going to own one bond fund, I'd own an inflation-adjusted bond fund," Jacobson said.
Here's how they work. Let's say you have a inflation-indexed bond worth $1,000 and a coupon that pays 4 percent. If, after one year, inflation is 3 percent, the bond is worth $1,030, so your interest payment is 4 percent of $1,030.
By contrast, a conventional bond does not take inflation into account, so the value of your investment -- the worth of the bond -- buys less over time if inflation is rising.
Inflation-indexed bond funds haven't caught the attention of the investing public yet, and there aren't many to choose from, Jacobson said.
There's the American Century Inflation Adjusted Treasury Fund and the PIMCO Real Return Fund, which has more than half of its portfolio in inflation-indexed bonds. The FPA New Income Fund has 37 percent of its portfolio in inflation-indexed bonds, said manager Robert Rodriguez.
While there are not many signs of inflation, Rodriguez said he used inflation-indexed bonds as a defensive strategy during the tough months of August and September 1998.
Most other bond fund managers were trying to take advantage of the low yields by investing in riskier long-term bonds. But Rodriguez was more conservative and instead increased inflation-indexed bonds in the fund by 14 percent since September.
As interest rates rose, prices on regular Treasury bonds fell almost 5 points, while the prices of Treasury Inflation Indexed Protection Security (TIPS) bonds were unchanged, Rodriguez said in an April note to shareholders.
The Consumer Price Index, the main gauge of inflation, was kept flat in the past year because of low oil prices, Rodriguez said. With the recent upturn in oil prices, the CPI is likely to rise more than 2 percent by the end of the year, he said. 
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