Gilts Tracker funds...?

C_Mababejive

I am just pondering what to invest in as i have previously sold and hold a good wadge of cash. I am concerned about the overheated equities market,no return rom banks/BS in cash and i did wonder whether a gilts tracker might be a good option to drip feed?

Seems to me low interest rates are here to stay for around 5 years and more and the best debt is Government debt..

GB00BG0QNW27

L&G all stocks gilt index trust

Mega low charges

bowlhead99

One of the reasons you're getting a low return on cash is precisely because the "risk free" rate achievable from government bonds is low. The yield on the two are correlated.

The best debt for the debtor not going bust, is government debt. As you would expect, this does not translate into the best debt for actually making any kind of return.

If you were a pension fund with several hundred million that you needed to "keep safe" you would have to hold some government debt. Not much of a yield, and the value of the debt can drop before you want to spend it or switch back to equities, but it's safe.

If you are a retail investor without millions to deploy, you don't need to use listed government debt which pays a pittance and accept the risk that the value drops with the market. Because, you can put £85k at a time into any number of bank accounts with full FSCS protection, with no risk that the bank doesn't pay you back.

Short dated government bonds which mature soon are safe from falls in market value but will not pay any interest at all. Medium bonds in the five to ten year range won't pay more than a couple of percent and can fall in value before you need the money. Longer dated bonds that mature in 20-30 years will yield a bit more but can lose a lot more.

While a government bonds tracker fund might be "cheap" in terms of your management fee plus platform fee not eating up a massive amount of the yield, the potential for loss is higher than bank accounts. You can get 3-5% on the first £30k+ per person by using high interest current accounts, and after that there are deposit accounts paying risk free 1%+ (or ISA versions if you need that) or national savings products if you have a huge wodge of cash that you can't be bothered splitting.

As such, government bonds trackers are quite a niche, with a non risk free solution to a problem a lot of people don't actually have. And if you think they are for you, I don't know why you would drip feed them from cash rather than just buying them now from cash. Do you want them more than an interest bearing bark account, or not?

kidmugsy

C_Mababejive wrote: »

i did wonder whether a gilts tracker might be a good option to drip feed?

Mega low charges

We're going to buy a couple of short-dated gilts. No charges at all, and certainty of coupon and maturity payments. Far better than a fund I think. For corporate bonds I'd certainly want a fund to get diversification, and for foreign sovereign bonds a fund too (otherwise can't hold in an ISA, I believe).

racing_blue

"A bond fund is risky because of NAV fluctuations. For example, the NAV for Vanguard Inflation Protected Securities fell 20.4% from peak to trough in 2008."

That's from the Bogleheads Wiki

(Edit: in fairness, that's misrepresenting the Boglehead Wiki article which is far more balanced & gives counterarguments.)

Thrugelmir

Aren't many Gilts offering negative redemption yields?

kidmugsy

Thrugelmir wrote: »

Aren't many Gilts offering negative redemption yields?

http://markets.ft.com/research/Markets/Bonds

masonic

kidmugsy wrote: »

http://markets.ft.com/research/Markets/Bonds

Why bother with short-dated gilts which have yields of <0.5% when you could put the money in a savings account paying around 1.5%?

EdGasket

masonic wrote: »

Why bother with short-dated gilts which have yields of <0.5% when you could put the money in a savings account paying around 1.5%?

Because the 'cash' might be in a pension fund or S&S ISA.

Gilt funds are not a good idea in my opinion because the returns are so low that the fund charge, although it might only be 0.25%, will probably be taking half of your measly expected return. Instead just buy one or more gilts directly. The shorter-dated the gilt, the less risk of a capital fall if/when interest rates rise.

If you fancy a short-dated corporate bond ETF, try iShares ERNS though you are exposed to GBP-Euro rates.

masonic

EdGasket wrote: »

Because the 'cash' might be in a pension fund or S&S ISA.

Well pensions would be a problem, granted, but a S&S ISA could be part transferred to a cash ISA to get around that problem.

I'm certainly on board with the argument for holding gilts directly vs via a fund, but at the moment I'm holding extra cash as a proxy and won't be buying any gilts unless I can get a premium over cash.

kidmugsy

masonic wrote: »

Why bother with short-dated gilts which have yields of <0.5% when you could put the money in a savings account paying around 1.5%?

Because it's just a temporary parking place within an S&S ISA.

Porcupine

kidmugsy wrote: »

Because it's just a temporary parking place within an S&S ISA.

But if it's a temporary parking place, are you likely to hold it until maturity? If not, you're taking the risk of the price dropping (even slightly) which would wipe out any coupon payments. If it's an ultra-short-dated gilt (few months) you'll get almost zero coupon, and if it's a longer dated gilt why can't you transfer to a cash ISA for that period?

I can imagine a stick-or-twist strategy (sell if the price went up, hold to maturity if the price went down), but either way is not going to pay very much.

And what about deal fees? Unless we're talking £100Ks+ here?