Schroders' liability-driven investment team has launched a range of five synthetic gilt funds intended to give investors a hedge against interest rate and inflation risks.

The new range of five pooled vehicles comprises two funds investing in fixed interest gilts and three investing in index-linked gilts. Each fund targets cash flows with specific maturities and characteristics in a bid to ensure that the synthetic gilt exposures in the funds will closely match the liabilities covered both at the outset and over the life of the strategy, the firm said in a statement.

“Traditional LDI hedging has been achieved through the swaps market. However, as a result of the downturn in the economy and associated gilt issuance, most gilt yields are currently higher than the equivalent swap yield,” said Andrew Connell, head of Schroders' LDI team.

He notes that over the past two years segregated mandates have been upping their use of synthetic gilt instruments such as total return swaps and repos in order to get access to liability coverage at more attractive yields. By investing in Schroders’ synthetic fund range, clients such as pensions can access more attractive yields than currently available in the swaps market without having the increased governance burden of a segregated solution, he said.