CSH2: taxation and performance

aroominyork

I’ve been holding unwrapped cash in TN25 which currently yields 4.56%; with the 0.25% coupon taxed at 20% that nets 4.51%. CSH2 has grown 5.3% over the last 12 months which, taxed at basic rate on capital growth, nets 4.77%. CSH2 has a spread of 0.04% compared to TN25’s 0.2% (presumably 0.1% if held to maturity). Some people question CSH2’s liquidity if there is a financial ‘event’, but if you leave that aside it currently looks a better option than nominal gilts, even if you have exhausted both your PSA and your capital gains allowance. Maybe the catch – and there’s usually a catch – is that when base rates fall, so will the return on CSH2?

aroominyork

I'm jumping back onto my thread to ask about the correlation between the base rate and CSH2. The ETF uses Sonia as its benchmark and I assume Sonia moves in close aligment wiht the base rate. Yet CSH2's performance graph shows a curve rather than sudden jumps, so how does it correlate with the base rate and, for example, what could I expect if base rates take a couple of 0.25% cuts this year?

GeoffTF

aroominyork said:

I'm jumping back onto my thread to ask about the correlation between the base rate and CSH2. The ETF uses Sonia as its benchmark and I assume Sonia moves in close aligment wiht the base rate. Yet CSH2's performance graph shows a curve rather than sudden jumps, so how does it correlate with the base rate and, for example, what could I expect if base rates take a couple of 0.25% cuts this year?

It is a curve without jumps because the interest accrues continuously rather than at discrete intervals. Here is the maths:

https://wumbo.net/examples/derive-exponential-function-compound-interest/

aroominyork

GeoffTF said:

aroominyork said:

I'm jumping back onto my thread to ask about the correlation between the base rate and CSH2. The ETF uses Sonia as its benchmark and I assume Sonia moves in close aligment wiht the base rate. Yet CSH2's performance graph shows a curve rather than sudden jumps, so how does it correlate with the base rate and, for example, what could I expect if base rates take a couple of 0.25% cuts this year?

It is a curve without jumps because the interest accrues continuously rather than at discrete intervals. Here is the maths:

https://wumbo.net/examples/derive-exponential-function-compound-interest/

Ignoring the formula (becasue I do not understand stats at that level) is it because CSH2 includes very short dated very safe bonds, so they turn over and affect the fund's price only when they mature?

masonic

aroominyork said:

GeoffTF said:

aroominyork said:

I'm jumping back onto my thread to ask about the correlation between the base rate and CSH2. The ETF uses Sonia as its benchmark and I assume Sonia moves in close aligment wiht the base rate. Yet CSH2's performance graph shows a curve rather than sudden jumps, so how does it correlate with the base rate and, for example, what could I expect if base rates take a couple of 0.25% cuts this year?

It is a curve without jumps because the interest accrues continuously rather than at discrete intervals. Here is the maths:

https://wumbo.net/examples/derive-exponential-function-compound-interest/

Ignoring the formula (becasue I do not understand stats at that level) is it because CSH2 includes very short dated very safe bonds, so they turn over and affect the fund's price only when they mature?

SONIA is an overnight lending system, so interest accrues daily on the index (of course the ETF uses derivatives). You wouldn't have enough resolution on a chart to see much difference between 1 day at 5.25% vs 5.00%. It would amount to a 0.0007% "jump".

aroominyork

AndyTh_2 said:

masonic said:

 This would be reported as foreign interest. The remainder would be capital gain.

however ERI would be due in the tax year of 6 months after the ETF's reporting end date, regardless of disposal or holding on to the asset, whereas the capital gain due only on disposal with the ERI as an allowable expense that will reduce the capital gain (similarly to notional dividends from accumulation units).

This is important to remember and it's also stated on this forum https://community.trading212.com/t/csh2-excess-reportable-income/64787/8 "The fund distribution date is the following 30 April, deemed to occur six months after the end of the reporting period, which is at 31 October. So the ERI of 31/10/23 will be reported 30/04/24 and taxable in the UK tax year 2024-25."

aroominyork

I’ve deleted yesterday’s post to correct some misaligned columns and to add SONIA, which is the benchmark for CSH2. This table shows that SONIA tends to hover just under the base rate, but as the base rate has risen SONIA has got incrementally closer to it (column "SONIA/base rate").

The right hand column shows the annualised CSH2 return (price data from Yahoo) as a percentage of SONIA (eg CSH2 returned 102% of SONIA between 23/3/23 and 11/5/23 when the base rate was 4.25%). CSH2 generally meets its aim to "achieve short term returns higher than the benchmark rate Sonia with extremely low volatility". What do people think will happen to CSH2 when the base rate starts being cut? Is there any reason to think it will not continue to be a good home for unwrapped cash if personal savings allowance and CGT allowance are both maxed out? It is currently returning better than low coupon short duration nominal gilts, even after allowing for 10% CGT on CSH2.

LHW99

I am using this in an S&S ISA, to gather up a few % cash as it provides a better rate than leaving the cash on the platform provider's rate.

For unwrapped cash at the moment, it seems to offer a better rate than easy access accounts would, and than most (all?) fixed rate bonds.

masonic

aroominyork said:

I’ve deleted yesterday’s post to correct some misaligned columns and to add SONIA, which is the benchmark for CSH2. This table shows that SONIA tends to hover just under the base rate, but as the base rate has risen SONIA has got incrementally closer to it (column "SONIA/base rate").

The right hand column shows the annualised CSH2 return (price data from Yahoo) as a percentage of SONIA (eg CSH2 returned 102% of SONIA between 23/3/23 and 11/5/23 when the base rate was 4.25%). CSH2 generally meets its aim to "achieve short term returns higher than the benchmark rate Sonia with extremely low volatility". What do people think will happen to CSH2 when the base rate starts being cut? Is there any reason to think it will not continue to be a good home for unwrapped cash if personal savings allowance and CGT allowance are both maxed out? It is currently returning better than low coupon short duration nominal gilts, even after allowing for 10% CGT on CSH2.

The short answer is that at some point the yield curve will no longer be inverted. When that time comes you'd be in a position to weigh up whether the duration risk premium is worth it. Until then longer duration debt seems to be priced according to predictions of falling rates that have not yet materialised.

aroominyork

masonic said:

aroominyork said:

I’ve deleted yesterday’s post to correct some misaligned columns and to add SONIA, which is the benchmark for CSH2. This table shows that SONIA tends to hover just under the base rate, but as the base rate has risen SONIA has got incrementally closer to it (column "SONIA/base rate").

The right hand column shows the annualised CSH2 return (price data from Yahoo) as a percentage of SONIA (eg CSH2 returned 102% of SONIA between 23/3/23 and 11/5/23 when the base rate was 4.25%). CSH2 generally meets its aim to "achieve short term returns higher than the benchmark rate Sonia with extremely low volatility". What do people think will happen to CSH2 when the base rate starts being cut? Is there any reason to think it will not continue to be a good home for unwrapped cash if personal savings allowance and CGT allowance are both maxed out? It is currently returning better than low coupon short duration nominal gilts, even after allowing for 10% CGT on CSH2.

The short answer is that at some point the yield curve will no longer be inverted. When that time comes you'd be in a position to weigh up whether the duration risk premium is worth it. Until then longer duration debt seems to be priced according to predictions of falling rates that have not yet materialised.

Agreed, but that answers a different question: of whether short duration is the right place to be right now. This is money in the proxy-cash bucket: OH stopped working recently and I'll probably start winding down during the next few years. The funds are in TN25 which has risen c.5.5% since bought about a year ago; its yield (to maturity next January) is now 4.3% so I want to check I am not missing anything before switching to CSH2.