Inflation-linked or regular gilts?

masonic

Thank you FeralHog. That's a fully formed and eloquent explanation of the niggling doubt I had starting to form in the back of my mind.

aroominyork

So I am edging towards holding hedged global aggregate but with an overweight UK. I would be happy with the fixed interest held within VLS20 (reducing my global equity index fund to compensate) but that adds cost (0.22% OCF). So the alternative might be to combine a global aggregate bond fund and a UK gilt fund. It wouldn’t be an exact match (eg I would miss the UK corporate bonds from VLS20) but is there any reason to think it wouldn’t get me reasonably close? The fixed interest within VLS20 is 32% non-UK bonds, 35% non-UK govt, 9% UK bonds, 24% UK govt.

Also, am I right in thinking gilt index funds do not combine nominal and index-linked gilts - they hold either one or the other?

masonic

I think you mentioned you hold corporate bonds elsewhere, so you would presumably hold some UK corporates (I'm content not to hold any corporate bonds). I've not seen any gilt index funds (or low cost active funds) that combine linkers and conventional gilts. I get my exposure using separate ETFs.

aroominyork

masonic said:

I think you mentioned you hold corporate bonds elsewhere, so you would presumably hold some UK corporates (I'm content not to hold any corporate bonds). I've not seen any gilt index funds (or low cost active funds) that combine linkers and conventional gilts. I get my exposure using separate ETFs.

Yes, I hold coporate bonds in strategic bond funds: Jupiter (70% bond) and RL short duration credit (100% bond). It is actually an upside to hold a gilt fund instead of aggregate fixed interest because it could bring my bond/govt split closer to 50-50.

tebbins

aroominyork said:

So I am edging towards holding hedged global aggregate but with an overweight UK. I would be happy with the fixed interest held within VLS20 (reducing my global equity index fund to compensate) but that adds cost (0.22% OCF). So the alternative might be to combine a global aggregate bond fund and a UK gilt fund. It wouldn’t be an exact match (eg I would miss the UK corporate bonds from VLS20) but is there any reason to think it wouldn’t get me reasonably close? The fixed interest within VLS20 is 32% non-UK bonds, 35% non-UK govt, 9% UK bonds, 24% UK govt.

Also, am I right in thinking gilt index funds do not combine nominal and index-linked gilts - they hold either one or the other?

Re: your first para as your question has been answered, the volatility and return advantages of a lower-risk multi-asset fund vs a pure gilt fund have already been covered elsewhere. But, you could consider Vanguard Target Retirement 2015. Currently it's 33/67, and will bottom out at 30/70 in 2022, barely anymore volatile than VLS20 (in calendar year 2018 when VTR15 would have been more like a 40/60 it lost -2%, VLS20 lost -1.1%, in the COVID crash VTR15 lost -12% Vs VLS20 -9.5%,). The VTR range have a long-term goal of keeping 1/6 of assets in the shortest maturity inflation-linked gilts (EDIT, they start start to add IL gilts and build upto a 1/6 weight by the target date, ish), also dampening volatility vs a specific IL gilt fund and reducing the risk from the market overestimating inflation.

 However if you want the diversification benefits - weakly correlated with equity and gilts - of average maturity IL gilts VTR wouldn't work.