Why This Inflation Bond Fund Isn't a Buy

American Funds Inflation Linked Bond BFIAX boasts a strong team of rates specialists and wider resources, but its emphasis on macro decisions, including bold rates calls and short credit positioning, could result in higher volatility relative to more straightforward inflation bond offerings. It earns a Morningstar Analyst Rating of Neutral for its cheapest share classes and a Negative for its priciest shares. Ritchie Tuazon, who joined Capital Group in 2011 after spending a decade at Goldman Sachs as a rates and inflation trader, leads this strategy. Tuazon is joined by Capital Group veteran David Hoag, who has been a manager on this offering since its inception, and rates specialist Tim Ng, who became a comanager here in February 2021. The managers are backed by Capital Group's deep fixed-income resources, including further rates contributors. Rather than using Capital Group's typical multisleeved approach, the strategy uses a more traditional team-managed approach to flexibly make duration, curve, and inflation calls. The emphasis on macro decisions is distinctive relative to its inflation-protected bond Morningstar Category. U.S. Treasury Inflation-Protected Securities make up the majority of the strategy's portfolio, averaging 88% of assets since its late-2012 inception. However, relative to its Bloomberg U.S. Treasury TIPS Index benchmark, there are times when the managers will take its duration, a measure of interest-rate sensitivity, two to three years longer or shorter than the index, an approach that sets it apart from most peers. Since mid-2016, the team has used a short credit default swap index derivatives position to manage the strategy's risk profile. This position can be sizable and reached a notional value of 45% of assets in March 2022. The short CDX position has often exceeded the strategy's long exposure to credit, which benefits the strategy if credit spreads widen. Since Tuazon took the reins as the strategy's lead principal investment officer in March 2017 through May 2022, its R6 shares have returned 3.8% annualized, besting 90% of distinct peers and outpacing its index by 24 basis points. That said, the strategy's stellar showing in 2020, when it outpaced peers by close to 500 basis points, has significantly boosted trailing returns and its propensity to take bold macro calls relative to more straightforward peers could result in higher volatility.

Key Proprietary Morningstar Metrics for American Funds Inflation Linked Bond

Morningstar Analyst Rating: Neutral Process Pillar: Average People Pillar: Above Average Parent Pillar: High

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