Gilt vs. wealth preservation fund for less than 2 years liability

itwasntme001

I have a BTL property with the current low rate deal expiring towards the end of next year.  I am very likely to keep the property as a BTL and given where interest rates are expected to be, I will want to pay off a significant portion of the mortgage.

I have some funds earmarked for this sort of purpose, currently held in a combination of wealth preservers (CGT and PNL).  I am wondering what forum member's opinions are on whether funds held to be used within a few years should be kept 100% safe in cash or gilts, or whether a wealth preservation fund is perfectly fine to hold (sold maybe a few weeks/months prior to the mortgage deal expiry) given its low volatility.

I would prefer to keep the wealth preservation funds for the chance they may start performing again, given their recent poor performance.  Especially with expectations for interest rates to fall.

If I go the cash/gilt route, I will be buying a low coupon short duration gilt yielding 4-5% currently.  In either case (keep the wealth preservation funds vs. selling), the tax implications are minimal so should not sway the decision.

Would be good to know what others would do, particularly from those who know about these wealth preservers.

masonic

There's nothing wrong with using non-zero risk assets to meet your future liabilities, just as long as you have options should the worst happen. Sometimes it makes more sense to sell some risky assets if they happen to have done well. But suppose there was some sort of crash in early 2025 and these fell 5-10%. Would this cause you issues?

I held both CGT and PNL through the pandemic up until interest rates peaked and they served a purpose. I hold them no longer and fortunately missed the worst of CGT's fall from grace.

GeoffTF

I am not a fan of the likes of CGT and PNL anyway. You can hold the underlying assets more cheaply, and they do not know the future any more than you do. The gilt is certainly sensible, and having sensible investments is the best you can do, unless you get lucky.

OldScientist

According to HL/morningstar

CGT appears to be currently holding about 70% in cash/bonds (both individual gilts and US treasuries), 15% in equities and 15% in 'other' (you'd have to dig further to find exactly what that is).

PNL is currently holding about 10% gold, 60% bonds and cash, and 30% equities

Cannot find the weighted duration of the bond component of either fund, so not sure how sensitive to yield changes they will be (or how much is already baked in). Since some of the bond holdings are US treasuries, I'm also not sure how sensitive to exchange rates they are (possibly currency hedged).

Individual short term gilts will give certainty to your cash flow and the amount at maturity, while cash (in the form of short term MMF or fixed rate savings accounts) or a short term gilt fund (e.g., ishares under 5 years - the duration of about 2 years nearly matches that of your 'liability') will be more sensitive to interest rate changes but shouldn't change too much and are likely to give rates of return similar to those of the individual gilts (assuming the market has priced things about right!).

masonic

OldScientist said:
Cannot find the weighted duration of the bond component of either fund, so not sure how sensitive to yield changes they will be (or how much is already baked in). Since some of the bond holdings are US treasuries, I'm also not sure how sensitive to exchange rates they are (possibly currency hedged).

In the not so distant past the bonds were very short dated and a significant proportion of them were inflation linked. The Treasuries were unhedged. This might have changed recently. The 'other' in CGT was primarily REITs (which contributed to the poor performance).

itwasntme001

OldScientist said:

According to HL/morningstar

CGT appears to be currently holding about 70% in cash/bonds (both individual gilts and US treasuries), 15% in equities and 15% in 'other' (you'd have to dig further to find exactly what that is).

PNL is currently holding about 10% gold, 60% bonds and cash, and 30% equities

Cannot find the weighted duration of the bond component of either fund, so not sure how sensitive to yield changes they will be (or how much is already baked in). Since some of the bond holdings are US treasuries, I'm also not sure how sensitive to exchange rates they are (possibly currency hedged).

Individual short term gilts will give certainty to your cash flow and the amount at maturity, while cash (in the form of short term MMF or fixed rate savings accounts) or a short term gilt fund (e.g., ishares under 5 years - the duration of about 2 years nearly matches that of your 'liability') will be more sensitive to interest rate changes but shouldn't change too much and are likely to give rates of return similar to those of the individual gilts (assuming the market has priced things about right!).

I can't find PNL info on duration but CGT have a presentation that states duration on their holdings and if I remember their index linked holdings, which are 50% of the portfolio, have a duration of 6?

So if real yield rise 1% then that is a loss of 3% on the NAV.

The risk for me is if short term rates rise because its a double whammy in terms of having to pay more of my mortgage (given mortgage rates would have risen) and the funds losing value if real rates are rising too.

Seems if I sell and park the funds in short dated gilts, I at least guarantee the amount I will have in time for the remortgage.

But of course the talk now is about rates having peaked and expected to fall given inflation falling.  So perhaps worth taking some risk and staying put in the funds for now?

masonic

itwasntme001 said:

But of course the talk now is about rates having peaked and expected to fall given inflation falling.  So perhaps worth taking some risk and staying put in the funds for now?

Do you think the market has not yet responded to the expectation of falling interest rates and this is not currently reflected in the price? For example, the yield on TN25, maturing in Jan 2025, is just 4.67%, whereas current base rate is still 5.25% and SONIA is 5.19%. Suggests about 3 cuts are priced in for the remainder of 2024.

Hoenir

itwasntme001 said:

OldScientist said:

According to HL/morningstar

CGT appears to be currently holding about 70% in cash/bonds (both individual gilts and US treasuries), 15% in equities and 15% in 'other' (you'd have to dig further to find exactly what that is).

PNL is currently holding about 10% gold, 60% bonds and cash, and 30% equities

Cannot find the weighted duration of the bond component of either fund, so not sure how sensitive to yield changes they will be (or how much is already baked in). Since some of the bond holdings are US treasuries, I'm also not sure how sensitive to exchange rates they are (possibly currency hedged).

Individual short term gilts will give certainty to your cash flow and the amount at maturity, while cash (in the form of short term MMF or fixed rate savings accounts) or a short term gilt fund (e.g., ishares under 5 years - the duration of about 2 years nearly matches that of your 'liability') will be more sensitive to interest rate changes but shouldn't change too much and are likely to give rates of return similar to those of the individual gilts (assuming the market has priced things about right!).

I can't find PNL info on duration but CGT have a presentation that states duration on their holdings and if I remember their index linked holdings, which are 50% of the portfolio, have a duration of 6?

So if real yield rise 1% then that is a loss of 3% on the NAV.

The risk for me is if short term rates rise because its a double whammy in terms of having to pay more of my mortgage (given mortgage rates would have risen) and the funds losing value if real rates are rising too.

Seems if I sell and park the funds in short dated gilts, I at least guarantee the amount I will have in time for the remortgage.

But of course the talk now is about rates having peaked and expected to fall given inflation falling.  So perhaps worth taking some risk and staying put in the funds for now?

Inflation is expected to dip then rise again. There's no forecasts that suggest that inflation will settle close to the 2% objective anytime soon. Hence the ongoing higher for longer mantra. Despite the considerable coverage on the topic. Central Banks haven't significantly changed their views on interest rates for a very long time. When the cuts do come. The noticiable impact is likely to be far lower than many people's expectatations. 

Linton

2 years is too short a time period for the wealth preservation funds. They are more appropriate for medium term investing ,   matching inflation over around 5 years.


Longer term gilts would suffer a fall in capital value should interest rates rise so if using gilts you should choose a maturity date close to when you need the money.

personally  I would probably keep the money in cash. The difference in £ terms between that and something more sophisticated would in my view be marginal and not worth upping your risk for.

Bostonerimus1

GeoffTF said:

I am not a fan of the likes of CGT and PNL anyway. You can hold the underlying assets more cheaply, and they do not know the future any more than you do. The gilt is certainly sensible, and having sensible investments is the best you can do, unless you get lucky.

I’m not a fan of wealth preservation funds either because I think they are mis-named as you can certainly lose money in them and also because of the fees they charge to make mistakes I can easily make myself for free ;-)

In the OP’s situation I would put the money in a money market fund , ultra short term bond/gilt fund or just the highest interest saving account I could find.

Aged

I bought into Troy Trojan O and CG Absolute Return about two and a half years ago, and have regretted it ever since.