GILTS or GILT Funds?

Gatser

I was looking for a pension/SIPP that would allow investment in GILTS.

* Alliance Trust SIPP: YES
* Skandia CRA PPension: NO
* SIPPDEALXTRA SIPP: YES

...but then I wondered... are GILTS really better to hold rather than the various Funds that deal in GILTS?
I am not clever enough to know the answer..... ?

Loughton_Monkey

Difficult to answer precisely.

If you stick, say, £10,000 in a specific GILT - with perhaps a 10 year term. - then you will pay today's 'market price' for that GILT. It was initially offered at £100 at 7%, but because the current interest rate (yield) for this remaining term is considered to be, say, 4%, you will have paid a much higher price. The 'thrust' of your investment is that if you faithfully hold it for the full term, you will average 4% yield.

Your trouble comes possibly 2 years down the line - when market interest rates rise to, say, 6%.

Whatever you do next is wrong. You only have 2 choices. Either you can hold it, in which case you will ultimately get your 4% - which will make you feel 'ill' for the next 8 years knowing that you are getting well below market yield. Or, you can sell it. But it will only sell at a price which represents a rather larger yield to the purchaser (for his remaining 8 years). By absolute definition, therefore (because over the life of the bond there was only a single total yield to 'go round') your own total yeild for the 2 years you held it is substantially below the 4% you envisaged freely upon buying the bond.

That's the 'price' you are paying for not shutting up and sticking with the 4% yield you 'agreed' to yourself when you bought it.

Now if we consider a 'Gilt Fund' then the only difference I can detect is that the specific 'bag' of Gilts you are buying a slice of will probably be a complete mixture, and may well have a higher yield than the Gilt fund down the road. It would be a function of the exact large complex mix of Gilts and when they were bought etc.

So I can see a scenario where a snapshot average yield of the fund's happens to be higher than you could find yourself in any individual Gilt, I can only assume that the 'charges' on the fund will tend to bring the total yield down substantially. But over time, the fund manager has to deal with regular coupons coming in and will only buy more and more Gilts at today's market yield - so over time, his overall yield must 'converge' to a pretty average figure. And of course whatever his mix of Gilts, a substantial move in Interest Rates is going to 'decimate' that capital value in those units - to roughly the same degree as the value of your own single Gilt.

I can see a small advantage in having a 'bag' of Gilts with a complete mixture of term, and redemption yield - but I can't 'value' it in my own mind. Whether this is enough to counteract the charges that you pay for the fund (less charges you pay to buy a single Gilt) I don't know.

So in short, I will conclude by saying that I'm not clever enough to work it out either!

Gatser

Loughton_Monkey wrote: »

So in short, I will conclude by saying that I'm not clever enough to work it out either!

....good detailed response though...thanks!

I prefer the clarity of buying gilts directly, at least you know where you stand with no fund management charges and various investment adjustments etc

sleepless_saver

If you buy an ETF like INXG you get the mix of gilts for a much lower cost (0.25% TER) than the average fund. I've opted for this, but still haven't been able to work out if it is a better option than buying direct:o.

purch

The one thing that you get by holding any fixed interest security directly, that you cannot get through holding via a collective investment vehicle is Maturity.

A fund cannot mature, and therefore you lose the main benefit of these securities, which is the knowledge and certainty of what you will receive at maturity.

It is this which in the main gives these products their low risk.

When you hold through a Fund these products are not low risk.

shaunrc

Care is required here guys because many individual gilts are trading above 100 so at the moment in tax terms it is likely to be better to hold a fund. This is because you cannot reclaim a capital loss but you do pay tax on the dividend...

Gatser

shaunrc wrote: »

Care is required here guys because many individual gilts are trading above 100 so at the moment in tax terms it is likely to be better to hold a fund. This is because you cannot reclaim a capital loss but you do pay tax on the dividend...

...but within a pension/sipp, tax is not an issue.

lvader

Gilts will be a poor investment over the next couple of years I think. Too many people looking to come out of them. We have already seen some pretty hefty drops in the last month or so.

Loughton_Monkey

purch wrote: »

The one thing that you get by holding any fixed interest security directly, that you cannot get through holding via a collective investment vehicle is Maturity.

A fund cannot mature, and therefore you lose the main benefit of these securities, which is the knowledge and certainty of what you will receive at maturity.

It is this which in the main gives these products their low risk.

When you hold through a Fund these products are not low risk.

Quite a valid point. It does make a 'fund' a slightly different animal from a single Gilt held directly.

However, when you go for a Gilt directly, then as I stated before, your redemption yield (as long as you hold it to maturity) is set in concrete (say, at 4.1%).

Your friendly local fund manager, however, has a huge bag full of these things - maybe holding the majority until maturity - but they will all, individually, have this 'benefit' of maturity. But his portfolio will have a mixture of yields - 3% to 8% perhaps. But I suppose the longer yields remain constant (as they probably have now, for almost a couple of years?) the reinvestment of dividend must ultimately make the whole bag converge to something like the current market yield.

And then there are charges.....

purch

Your friendly local fund manager, however, has a huge bag full of these things - maybe holding the majority until maturity - but they will all, individually, have this 'benefit' of maturity

Yes, but you the Fund holder does not benefit from this.

You can only buy and sell your holding at the current price, which adds a layer of risk.

Not necessarily good or bad, but an additional risk that you would not have with a directly held security.