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

aroominyork

Aged said:

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

If you'd bought a gilt index fund you would have done much worse. And by choosing Trojan and CG Absolute Return over Capital Gearing Trust you also did much better. But it's often only when things go wrong that people look under the bonnet to see what a fund actually holds, rather than being drawn in by its name or strapline (such as 'wealth preservation'). Anyway, given their objectives which are usually to preserve or increase the real value of your money over the medium term, they have not yet failed the test.

george4064

Seems a lot of negative views on wealth preservation trusts, what alternative(s) do people suggest holding for the low risk part of retirement portfolios?

aroominyork

george4064 said:

Seems a lot of negative views on wealth preservation trusts, what alternative(s) do people suggest holding for the low risk part of retirement portfolios?

I think two things are going on here. One is that plenty of people just do not like WP funds; that might be because they do not meet their personal needs or they think WP funds are just an expensive way to hold pretty bog-standard investments. The second is that some people thought WP funds would magically preserve their wealth in real terms and were shocked when, during recent years and interest rate rises, they didn't.

But WP funds can mount a fair defence. Over the last three years Troy Trojan has risen over 10% and CGT, despite going from premium to discount, has risen 3%. That compares well to a gilt index fund which has fallen 21% or an index-linked gilt index fund which has fallen 26%. So for people who trust the WP fund managers to choose when to back equities and when to play it safe(r), they are still useful. And as low risk alternatives, bonds generally are back in fashion.

JohnWinder

 what alternative(s) 

Government bonds of suitable duration, a big dollop of which inflation linked; including foreign if currency hedged, all at low cost. And a higher interest savings account.

Bostonerimus1

george4064 said:

Seems a lot of negative views on wealth preservation trusts, what alternative(s) do people suggest holding for the low risk part of retirement portfolios?

Cash, Gilt/Bond funds, even Dividend equity funds or anyone of the cheaper open ended multi-asset funds that emphasize bonds 

Aminatidi

I'm not convinced any fund is suitable for money you need in two years except perhaps a MMF.

OldScientist

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 only reference I can find pertaining to maturity for PNL is on page 25 of the 2023 annual report (now a year out of date) where 47.5% of the fixed income was under 1 year, 26.4% between 1 and 5 years, and 26.1% over 5 years. If you assume the categories are 6 months, 3 years and 7.5 years, then the weighted maturity would be about 3 years (and duration a bit less than that).

In each case, I think it is the 30% not in fixed income that presents a risk - whether that is acceptable would depend on whether, e.g., a 50% drop in equities and consequently a 15% drop in the NAV would make that much difference to what you need the money for.

OldScientist

aroominyork said:

george4064 said:

Seems a lot of negative views on wealth preservation trusts, what alternative(s) do people suggest holding for the low risk part of retirement portfolios?

I think two things are going on here. One is that plenty of people just do not like WP funds; that might be because they do not meet their personal needs or they think WP funds are just an expensive way to hold pretty bog-standard investments. The second is that some people thought WP funds would magically preserve their wealth in real terms and were shocked when, during recent years and interest rate rises, they didn't.

But WP funds can mount a fair defence. Over the last three years Troy Trojan has risen over 10% and CGT, despite going from premium to discount, has risen 3%. That compares well to a gilt index fund which has fallen 21% or an index-linked gilt index fund which has fallen 26%. So for people who trust the WP fund managers to choose when to back equities and when to play it safe(r), they are still useful. And as low risk alternatives, bonds generally are back in fashion.

The 'All stocks' index had a duration of about 12-13 years in 2020 and 2021 (it has since fallen to around 9 years) so maybe a bit long since for a fixed income component, since the fall was dependent on maturity - e.g., in calendar years 2021, 2022, 2023, cash (3 month bills) rose by 0.07%, 1.47%, and 4.94%; the 0 to 5 year index had returns of -1.6%, -4.5%, and 4.1% and the 0 to 10 year index -2.8%, -8.7%, and 4.7%. Both the 0 to 5 year and 0 to 10 year have funds following the index (the latter only very recently).

So, a passive portfolio of 30% allocation to HSBC FTSE All world (which has risen by about 30% over the last year years), together with a 35% allocation to a ST MMF and 35% to the 0 to 10 year fund (or 0 to 5 year) would come close matching the performance of both Trojan and CGT over the last three years or so. Of course, the question might be whether three years ago a cautious retiree would have opted for such a portfolio rather than (say) 30% HSBC FTSE all world and 60% 'All stocks' gilts, and 10% cash which would have performed much worse.

Probably getting a bit OT now.

itwasntme001

masonic said:

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.

Yes of course its been priced in, I was actually thinking if things get more doveish than they are now, in which case I would expect the funds to do well.  Although that'll depend on inflation expectations/ BE inflation as well.

itwasntme001

aroominyork said:

Aged said:

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

If you'd bought a gilt index fund you would have done much worse. And by choosing Trojan and CG Absolute Return over Capital Gearing Trust you also did much better. But it's often only when things go wrong that people look under the bonnet to see what a fund actually holds, rather than being drawn in by its name or strapline (such as 'wealth preservation'). Anyway, given their objectives which are usually to preserve or increase the real value of your money over the medium term, they have not yet failed the test.

Yes good point.  The alternative would have been a bond fund when I invested in these funds a few years back.  As it happens my return on these funds are more or less the same as if I had just stuck to a high interest savings account.  So for the risk hasn't been worth it but for the chance of some out-performance I guess it hasn't been too bad.  Not all investments turn out as you would expect would be the important lesson here.