What sort of gilts?

edinburgher

Technically this is a pensions question, but it seemed a better fit here. I'm still young enough to have 30 years of work ahead of me if I'm unlucky, but I've no plans to work 'til I drop. I am currently 100% in equities and I'd like to reduce this just a little (something like 1-2% a year until I reach 80/20 equities/not equities).

My pension fund choices are limited and the options would seem to be:

L&G cash fund
L&G Index Linked Gilt Fund
L&G Over 15 Year Gilts Index Fund

Could someone help to explain the major differences between the two gilt funds? The index linked gilt fund would appear to consist of over 60% >15 year gilts, I'm not sure what would be a better choice for the future. To be honest, I would prefer to have access to some corporate bonds, but there doesn't seem to be anything of this nature available to me.

kidmugsy

Gilts are such lousy value at the moment that you might be better off moving towards 80% equity/20% cash. Anyway, have a read here.
http://blogs.ft.com/andrew-smithers/2014/08/long-term-investing/

Thrugelmir

30 years is a long time to be holding gilts at today's low yields.

I diversify by holding shares (via a SIPP) in investments such as Twenty Four Income Fund. Risk is compensated by a gross yield in the region of 6%.

The_Bhoy_3

Index linked gilts provide inflation protection, so you'd prefer them to standard gilts if thought inflation was going to rise.

That said, neither standard or index linked gilts looks attractive right now, particularly if the Bank of England start raising interest rates as expected within the next 6 months.

Given that you have as long time horizon them you should be able to ride out any turbulence in equities, but it is poor that you have such a limited choice of investment funds since something like property would be a good alternative.

SomeUser

What other funds to you have? e.g. diversified growth, absolute return, mixed investment? Can you list all the funds?

Many of the more modern funds aren't 100% equities so they might fit the bill.

I'm very surprised there isn't a bond fund and I would complain to the trustee or your employer (if a GPP or stakeholder). There's currently a huge regulatory emphasis on the default fund and fund range being suitable for the needs of the membership. If Trust based, the new code of practice has been introduced and it specifically mentions fund range. Contract based schemes are currently undergoing an FCA consultation with proposed changes for a new governance regime from April next year.

I'm not sure gilts are the way to go, but it does depend on your attitude to the different types of risk. Unless your current pension is very cheap (unlikely as it appears to have little governance) or restricts transfers, I'd consider setting up a personal pension or SIPP and doing regular transfers from your occupational or workplace pension to get access to more funds.

bowlhead99

The index linked gilts provide some inflation protection but they only really come into their own if the inflation is actually higher than the market expects (i.e., the market has already priced in current expectations into today's bond prices). As a generalisation I'd usually probably prefer them to long maturity non-indexed gilts. But that is not saying much because at the moment, I don't really see a lot of value in 15-30 year gilts.

To be honest, I think it's unlikely that your only choices are literally 100% equity or 100% gilt and no middle ground. Quite simply, the average person joining the pension and not wanting to build themselves a tailored portfolio out of lots of building blocks, would usually have a choice of multi-asset funds available to them, whether their need is for an adventurous/ aggressive fund which is equities heavy or a more cautious fund which is equities light or a moderate fund in the middle.

It would be very unusual if new joiners to a pension scheme could not just plump for those options and instead were expected to craft their own mix from dedicated equity and bond funds in a specific proportion.

So, to get your equities down from 100% I would have thought you could just find a multi-asset fund that's got a mix of non-equity stuff in it and then just use your own personal choices of pure equities funds around the side to pull your overall equities component back towards the 95% level or wherever you think is appropriate.

The other way of doing it is as Thrugelmir or Someuser have suggested: contribute to (or transfer to, if allowed by your current scheme rules) a SIPP or other personal pension on the side where you can find the actual non-equities fund or asset you want (high yield fund, corporate bond fund, strategic bond, low equities multi-asset, REIT etc etc). The downside is that the two pots can make it more awkward to rebalance your holdings from time to time but it's still quite do-able.

edinburgher

Thanks for the input all.

There are various (managed funds) with some exposure to bonds, but these don't sit with my decision to use index tracking products to keep costs down. I'd struggle to lifestyle without quite a lot of overlap between products.

As multiple people have commented on, most people using a bog-standard work pension like this one won't want to tweak allocations, they'll pick a multi-asset fund and hope for the best. That's fine, but several of these choices seem to have performed quite poorly over the last 5+ years and Tim Hale's 'Smarter Investing' made a big impression as regards picking winners.

Thrugelmir's suggestion sounds like a very good idea, nothing to stop me holding bonds/any other diversifying investment in a SIPP/elsewhere. That said, I'd probably just top up my ISA until my pension reaches a decent size. Still early days, I miss my civil service pension

SomeUser

If you have a DGF based on schroders, it's not cheap but it's an actively managed passive portfolio. In simple terms, the underlying investments are tracker funds, but the manager actively manages the split of asset classes in line with the fund objectives. If it starts performing above the target (RPI +5), then it de-risks. It means that it's less volatile but performs as well as equities (although RPI+5 is over-egging it a bit).

I'm a firm believer in passive funds and most core fund ranges are built around them, but I wouldn't necessarily dismiss an actively managed diversified fund. I would be interested in the governance of your scheme though. Now I suspect it's quite high - actively managed funds mean the governance is significant and the trustees (if occupational) have a duty to protect member's assets which is far more than you'll get from a personal pension or SIPP. A trustee board will meet every 3 months and monitor the investments, precisely because most people do just pick a fund and hope for the best and someone has to ensure it's doing what it should. More than one managed mixed investment fund suggests that the scheme is well run and your assets are probably safer than if you self selected from a SIPP. The trustees pay for professional investment advice will bills running into thousands of pounds a year, to ensure the funds are performing as they should and continuing to meet the profile of the members. Companies who have mostly factory workers should have a different fund range to investment managers.

As an aside, we were heavily opposed to the charge cap, it should be about quality not only price.

SomeUser

I realised I was using acronyms. Schroder Diversified Growth Fund http://www.trustnet.com/Factsheets/Factsheet.aspx?fundCode=I4F89&univ=N

rpc

edinburgher wrote: »

There are various (managed funds) with some exposure to bonds, but these don't sit with my decision to use index tracking products to keep costs down.

You can get bond trackers. Vanguard (and others) do OEICs and both ISXF and SLXX are popular ETFs.

kidmugsy

Here's a chap who thinks that if you must hold a fund of bonds it shouldn't be an ETF.
http://abnormalreturns.com/to-bond-etf-or-not/

Which wouldn't matter, it seems, for the OP.