UK Gilts in ISAs

slinga

I see H & L are offering a range of ISAs based on UK Gilts.
Returns range depending on which ISA you choose but are generally from 0% to 13% ish.
I'm considering the M&G and the AXA Framlington with the AF being much more volatile.

I'm not fully up to speed with Gilts.
What do they they vary with? Inflation or Gov Interest Rates or the Footsie.

I know that may be a silly question but the ISAs of the Gilts can't just be based on the Gilts themselves or they'd be a constant rate of interest???

I've thought about investing in Bonds and Gilts before but haven't because I didn't understand them but I'd really like to invest now.
I see the M&G Gilt and Fixed Interest ISA has returned about 40% over 5 years and during that time hasn't had any big downside.

Any info, tips etc thankfully received.

pqrdef

The general idea is that if a bond's nominal rate is above the general going rate, you pay a premium to buy it, so your yield (your return on your money) is different from the nominal rate. It's also different from the quoted yield, which is based on the current market price, which is different from what you paid.

And the longer the bond has to run, the bigger the premium. This means that long-dated bonds are price-volatile, whereas the market price of short-dated bonds converges towards par as they approach maturity.

The upshot is that short-dated bonds - especially gilts - are regarded as near-cash, and can be compared with fixed-term savings accounts. Being near-cash, they don't qualify for S&S ISAs.

Long-dated bonds are held by pension funds etc which have long-term commitments - they don't care about the market price because they plan to hold until maturity. For other mortals, long-dated bonds are mostly a market play, a bet on the future direction of market prices.

Different funds (OEICes not ISAs) offer different kinds of exposure.

With gilt funds, exposure is about all you get. The fund manager doesn't have much in the way of choice, and he's got nowhere else to go, so if his gilts go up, he can't take profits and buy something cheap, he can only sit on his gilts and watch them go down again.

They may well be up at present. At any rate, yields are the lowest ever. QE is a massively disruptive influence on the gilt market. But you have to consult your own crystal ball.

slinga

pqrdef wrote: »

They may well be up at present. At any rate, yields are the lowest ever. QE is a massively disruptive influence on the gilt market. But you have to consult your own crystal ball.

Thanks for the reply.

In that case how come the M&G Gilt and Fixed Interest ISA is up 40% over the last 5 years and hasn't had any major reversal.

pqrdef

slinga wrote: »

In that case how come the M&G Gilt and Fixed Interest ISA is up 40% over the last 5 years and hasn't had any major reversal.

If a gilt pays 4% on par value, but it's currently yielding 2%, that means it's selling in the market at double par value. No, that's oversimplifying, because the yield figure is calculated on total return to maturity, so it takes into account the loss of premium as well. But basically, low yields = high prices.

jamesd

Your question is very worrying because it implies that you do not understand that you're considering investing in assets that are currently in a bubble.

The yield on gilts depends on the interest rate and price. As the capital value and cost increases, the yield falls and vice versa. The economic crisis and fiscal easing have caused people to be compelled to buy or choose to buy some of the safest assets, gilts. This has caused their prices to rise and their yields to fall. This has been going on for most of the period you're looking at.

As the financial troubles ease, fiscal easing ends and interest rates rise, you can expect to see capital value drops comparable to the capital value increases that you have seen over the last five years.

Do not buy gilts or gilt funds unless you are certain that you very thoroughly understand that you are buying an asset that is in a bubble created by temporary effects that will reverse.

Gilts are normally a low volatility, often called low risk, investment. This is not true in the medium to long term at the present time because of the bubble issue. If you're thinking of holding the investment for perhaps three to six months, maybe as long as two years, the low volatility might be useful but the risk is still significant even over two years.

It's likely that until there is some sustained recovery there will still be times when capital values increase. The bubble is there, but knowing exactly when it'll stop inflating and start popping is tough.

If you want an alternative, you might consider commercial property investments that own actual buildings. This is an undesired sector at the moment so prices are lower than they are likely to be longer term.

kidmugsy

Gilts are poor value at present. I'd only buy them directly, never in a fund. A fund not only has very different characteristics from a gilt, it costs you money in charges too.

slinga

kidmugsy wrote: »

Gilts are poor value at present. I'd only buy them directly, never in a fund. A fund not only has very different characteristics from a gilt, it costs you money in charges too.

So which fund(s) have beaten the 40% rise in M&G Gilt and Fixed Interest ISA over the past 4 years. Or even other investments.

Certainly none of the UT funds I own have come close.

Eonel

slinga wrote: »

So which fund(s) have beaten the 40% rise in M&G Gilt and Fixed Interest ISA over the past 4 years. Or even other investments.

Certainly none of the UT funds I own have come close.

Slinga - you need to read & understand jamesd post. There are environmental reasons for a 40% rise over the last few years.

In the coming years the environment will likely correct and if you buy more gilts now you will likely lose money.

If you believe the economy is on the road to recovery it may also be a good time consider transferring your ISA out of Gilts. Lock in the 40% profit you have made.

slinga

Eonel wrote: »

Slinga - you need to read & understand jamesd post. There are environmental reasons for a 40% rise over the last few years.

In the coming years the environment will likely correct and if you buy more gilts now you will likely lose money.

If you believe the economy is on the road to recovery it may also be a good time consider transferring your ISA out of Gilts. Lock in the 40% profit you have made.

No I understood his post although not sure kidmuggsy understood my first post in this thread.
I was asking if any UT funds had beaten the 40% gain over the last 5 years.

Aegis

slinga wrote: »

No I understood his post although not sure kidmuggsy understood my first post in this thread.
I was asking if any UT funds had beaten the 40% gain over the last 5 years.

About 156 funds have done so, according to Trustnet. However, the question to ask is "Why does it matter whether funds from other sectors have outperformed gilts over the last 5 years when the last 5 years have been so unconventional for gilts?"

pqrdef

slinga wrote: »

So which fund(s) have beaten the 40% rise in M&G Gilt and Fixed Interest ISA over the past 4 years.

Fine if you bought in 4 years ago, but you've missed that boat now.

Bonds can't go on rising in price indefinitely like shares can, because they're redeemed at nominal value when they mature, and in the meantime, they only pay interest as a fixed percentage of nominal value.

Whereas with shares, the dividend per share per year might grow to more than the original issue price of the share.

So bond prices are effectively capped, though the Bank seemingly has enough magic to raise the cap higher than anybody thought possible.

However, if the latest GDP figures turn out to be more than a flash in the pan, the magic may have to be reversed pretty quickly to prevent inflation taking off.