Eurozone Investor Bond Allocation All Global Euro Hedged vs Some Eurozone Inflation Protected

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Pyrrho
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Joined: Wed May 16, 2018 7:09 pm

Eurozone Investor Bond Allocation All Global Euro Hedged vs Some Eurozone Inflation Protected

Post by Pyrrho » Wed Nov 07, 2018 6:24 pm

I am helping an elderly Irish retiree to invest a modest sum of money. He has a pension that covers his living expenses, but he does not want to risk losing too much of his capital, so we’ve decided on a 25/75 stock/bond allocation. I’m wondering if we should assign the entire bond portion to a euro hedged global bond ETF, or if we should split it between a euro hedged global bond ETF and an inflation protected Eurozone government bond ETF. As the primary goal is simply to protect his savings against inflation, I’m inclined to split the bond portion 75/25 global/Eurozone inflation protected. There’s an iShares ETF that tracks the Bloomberg Barclays Euro Government Inflation-Linked Bond Index, which is about 47% France, 26% Italy, 15% Germany, and 12% Spain:

https://www.ishares.com/uk/individual/e ... -ucits-etf

I have two minor concerns: (1) the degree of correlation between inflation in Ireland and in the issuing Eurozone countries, and (2) the quality of Eurozone government debt…

As far as I can tell though from the OECD’s website, despite Ireland’s economy being more closely tied to the US business cycle, there is a pretty close correlation between French, Italian, German, Spanish, and Irish inflation:

https://data.oecd.org/price/inflation-cpi.htm

And while I’m aware of the problems with Italian public debt, I believe that the probability of a sovereign default is not terribly high, and since the total amount of the portfolio allocated to Italian bonds would be less than 5%, even a default would not be catastrophic (not counting the indirect negative ripple effect such an event would presumably have on the rest of the portfolio).

So my question is whether there’s a strong reason that I may be overlooking not to allocate 25% of the bond portion of the portfolio to inflation protected Eurozone bonds as a small hedge against unexpected inflation. Any feedback would be greatly appreciated…

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