Long Gilt

alan014

I am very much a novice and probably asking a daft question but here it goes!
I just checked on my pension funds and noticed the Aviva Pension Long Guilt Fund (S2) had gone down by approx 40% over past couple of years. 
Just googled about gilts and it seems to show a yield of 4.5% with no real sign of any great drop recently?  I assume i am looking at this incorrectly , if anyone has an explanation of this level of drop it would be appreciated!

coastline

Inflation has picked up rapidly since covid as commodity prices rose very sharply. Central banks worldwide raised interest rates in an attempt to combat inflation. History shows inflation usually picks up after a crisis. 

FeOEQ5hWYAMfnLH (900×579) (twimg.com)

Set both of these charts to 5 yrs to see the effects..

United Kingdom Inflation Rate - August 2023 Data - 1989-2022 Historical (tradingeconomics.com)
 
United Kingdom Interest Rate - 2023 Data - 1971-2022 Historical - 2024 Forecast (tradingeconomics.com)

As a result bonds/gilts became less valuable ( if that's the word) and adjusted in price to reflect the rises in interest rates . Why would you hold a gilt at say 2% yield when you can get 5% in a basic bank account ? Most multi asset pension funds have had a similar return of late. Most employees are in default pension funds where maybe more than 50% is invested in gilts/bonds.
Again set to 5 yrs.

United Kingdom 30-Year Treasury Gilt Auction - 2023 Data - 1980-2022 Historical (tradingeconomics.com)

United Kingdom Government Bond 10Y - 2023 Data - 1980-2022 Historical - 2024 Forecast (tradingeconomics.com)

Few examples.

Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

Chart Tool | Trustnet

Aviva S2

Life and Pension Fund Prices and Performance|Aviva Long Gilt S2 Pension Fund|ISIN:GB0009673764 (morningstar.co.uk)

zagfles

No sign of any great drop?? What are you looking at? All long dated gilts have plummetted around 50% over the last 2 years. Mainly due to rising interest rates. Good news is if you're looking to buy an annuity the annuity will be much better value. The usual reason for investing in gilt funds is if you're looking to buy an annuity.

alan014

Thank you for the explanation.  I would not be looking to buy an annuity and indeed it is part of a  multi asset pension fund. 
I am suprised that the asset manager didnt switch funds as interest rates started to rise , or is it more of a long term decision to keep things more diversified?
I suppose its best to stick with it now hoping rates gradually fall and gilts then recover rather than transfer into other funds whilst at such a low level ?

JohnWinder

An important number with bonds or bond funds is ‘duration’, a measure of the average time to get your money back, and a useful measure of how their prices will fluctuate with interest rate changes. If duration is 10 years, a 2% change in interest rates will alter the price by 20% (10x2).
Sadly, I can’t find your fund’s duration, but the bonds in it mature in >15 years mostly, so its duration will be a bit under >15 years.

You should get better returns with longer duration bonds, making them a better investment than shorter ones; but dramatic changes in interest rates change all that as you’ve experienced. Yours will come good over about 15 years if interest rates don’t change much from now, but if you want to avoid drops like you’ve had you need to be in a fund with a shorter duration. At 62 years, you might well have 20 years of investing ahead of you, so your fund is not tragic; indeed as it’s been replenished with higher yielding bonds over the last 2 or 3 years it could do quite well for you. But you’re better off understanding that sort of thing unless you have implicit faith in your advisor. Read Tim Hale’s book Smarter investing, because you need to start thinking about getting into shorter duration bond fund(s) in the coming decade.

‘I am suprised that the asset manager didnt switch funds as interest rates started to rise , or is it more of a long term decision to keep things more diversified?’

If you’re referring to the fund manager, they have no discretion as they’re tracking an index. If you’re referring to your portfolio manager, well, we’d all like to have managers who anticipate market moves accurately to our profit. Forget it.

‘I suppose its best to stick with it now hoping rates gradually fall and gilts then recover rather than transfer into other funds whilst at such a low level ? ‘

Recover or not, you need to stick with it until you understand enough to make a sensible decision about change. Falling rates would be a blessing for you, as they’d force up the price of your fund, allowing you to move to a shorter fund; but then you’d be stuck with bonds paying a lower interest than now which is not what bond holders want. They want high interest paying bonds. Not easy to win, but at least get an understanding of it.

And do read this thread: https://forums.moneysavingexpert.com/discussion/6470635/how-long-do-bond-funds-take-to-recover-after-a-sharp-rise-in-yields#latest 

drphila

zagfles said:

The usual reason for investing in gilt funds is if you're looking to buy an annuity.

Could you explain this, please

jimjames

alan014 said:

Just googled about gilts and it seems to show a yield of 4.5% with no real sign of any great drop recently?  I assume i am looking at this incorrectly , if anyone has an explanation of this level of drop it would be appreciated!

The yield won't show a drop as it's fixed. The drop will be in the price you buy at which is the way the yield adjusts for current and future interest rates.

coastline

drphila said:

zagfles said:

The usual reason for investing in gilt funds is if you're looking to buy an annuity.

Could you explain this, please

I'm not answering the question here as that's another issue. The OP has stated the fund in question was part of a Multi Asset pension fund with Aviva. As I mentioned earlier in the thread most investors/employees are in pension default schemes and gilts/bonds play a huge part. Even DIY investors are reluctant to go 100% equity so it's reasonable to believe they also have a fair allocation in gilts etc. The OP isn't alone in recent performance as there'll be millions out there. Basically the majority of investors/employees are heavy into gilt/bonds regardless of links to annuities.
This article is an interesting read showing how pension funds have moved away from equity ( a huge chunk from UK) and more into international investments including more bonds and cash.( those charts clearly show the direction over years ) . There's other links on the article which add more information.


 Stop blaming everything on pension funds (schroders.com)

alan014

Many many thanks John and coastline that information is invaluable to me and has given me a good insight of what has happened!  Indeed I am in no panic and realistically I am planning on drawing down over the next 20/25 years.
Having looked more deeply the Aviva S2 states:  The Fund aims to track the performance of the Financial Times Actuaries Government over 15 years Gilt Index before the deductions.

I will consider this further and have to decide if I leave things in my pension in the default Aviva Multi Asset pension funds or be cavalier and look at funds myself and move to them or  seek financial advice ! 

zagfles

drphila said:

zagfles said:

The usual reason for investing in gilt funds is if you're looking to buy an annuity.

Could you explain this, please

Annuities use gilts, so if gilt prices go down, annuity rates go up and vv. So if you intend to buy an annuity a gilt fund would hedge (at least partially) against rate changes.

gm0

@drphila

Two reasons why gilts investments are linked to annuties

Being in equities up to the day before buying an annuity at a fixed date.  Could be the day after a huge equity market correction.  Which quite easily halves your pension forever and/or delays your plans by years. 
So people traditionally moved to gilts (from which annuities are built) so this fixed date meets sequence risk could be avoided.  Before pension freedoms this problem came in two flavours - people wanting to retire (but now can't) - pot just halved.  And people forced by law to buy an annuity at the age limit in an age cohort when markets were in a state and they did not want to do it until later when capital values had recovered more.  But they were not allowed flexibility.

If central bank interest rates rise (like last year) then the value of existing gilts falls to put the yield back to the base rate + the paid for credit risk element.  The bond doesn't change at all.  Same coupon. Nominal capital at the end. But what you can buy and sell it for along the way does.  And because gilt rates rise with interest base rate.  And annuties are largely built out of them inside the life company).  Then so do annuity rates per lump of capital - these rise as central bank base rates do. 

When interest rates were flatlined for a long time (and then QE) - annuity rates fell and fell and were generally awful. 

So gilts are a well "matched" investment in that regard for the potential annuitant at least for a short while preceding the transaction.  How many gilts (or riskier (credit risk) bonds you want alongside equities in a general investment mix is whole different conversation.

For drawdown the situation is different - there is no single fixed date where all the pot is deployed.  So the level of derisking for sequence risk is quite different and there is a weaker incentive to sell equities and invest in something else.  More modern automatic "lifestyling" pensions have more than one option to handle derisking for an annuity or drawdown differently.

/* Healthwarning - oversimplification alert.  The relationship between annuity rates offered and long gilt yields and central bank base rate is more complex than the above.  Complexity which isn't needed for a first pass explanation. The relationship exists but it isn't a straight read across.*/