Eaton Vance Management has launched the Eaton Vance Short Term Real Return Fund, an income mutual fund seeking to earn returns in excess of inflation with less exposure to real interest rate risk than other inflation-protected bond funds.
The fund intends to invest primarily in a combination of short- and intermediate-maturity treasury inflation protected securities, floating-rate corporate loans swapped to the US Consumer Price Index and other "real return" instruments.
TIPS are issued by the US Treasury and pay a fixed interest rate on a principal amount that adjusts monthly for changes in the CPI.
Floating-rate loans generally pay an interest rate consisting of the London Interbank Offer Rate plus a credit spread. Using swaps, the fund intends to convert the floating rate exposure of loans held from Libor to the CPI.
On an overall basis, the fund intends to limit its real duration to four years or less and to maintain a weighted average credit quality of investment grade.
"Eaton Vance Short Term Real Return Fund seeks to protect shareholders against rising inflation by investing in two income asset classes whose returns are among the most closely correlated with inflation: short- and intermediate-maturity TIPS and floating rate corporate loans," says Payson Swaffield, chief income investment officer at Eaton Vance. "With real interest rates today near historic lows, we see a significant risk that the performance of traditional inflation-protected income funds that hold longer-maturity TIPS could disappoint in an economic recovery. We believe a prudent inflation-protection investment strategy should incorporate significant exposure to short-term real return investments such as employed by the fund."
Eaton Vance has been managing TIPS investments since 2001 and floating-rate loan portfolios since 1989, when it launched one of the first dedicated loan funds. As of 31 January 2010, Eaton Vance managed USD18.2bn in floating-rate loan assets.
The fund is co-managed by Thomas H. Luster, a vice president of Eaton Vance Management, director of the firm’s investment grade income group and co-portfolio manager of Eaton Vance’s investment grade income portfolio, and Stewart D. Taylor, a vice president of Eaton Vance Management and senior trader in the investment grade income group.