Money market funds

Hoenir

SouthCoastBoy said:

Personally, it is not about maximising returns, but ensuring I do not run out of money. I'm not keen on annuities for a number of reasons. We are constantly reminded that equities are for the long term (e.g. 5 to 10 years minimum investment) therefore if you need money before that imo it is best to keep it out of equities, hence I have at least 10 years of cash/STMMF. As I use my cash reserves I plan to top them up at opportune moments (so you could call that timing the market)

Long term is over 10 years. Starting at 15 would be nearer the mark. 

OldScientist

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

SouthCoastBoy

OldScientist said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

I'm still unsure how to buy index linked gilts on the issue date. Personally after that point there is a market price so no longer buying at par so don't see a benefit in buying bonds then

OldScientist

SouthCoastBoy said:

OldScientist said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

I'm still unsure how to buy index linked gilts on the issue date. Personally after that point there is a market price so no longer buying at par so don't see a benefit in buying bonds then

Whether bought at par or not, they still provide inflation protection. For example, taking T44 (matures in 2044, 0.125% coupon), the price today is about 82 (according to yieldgimp) and the yield 1.15% real. So, ignoring any bid/ask spread and transaction costs, spending £1000 today would, in 20 years time mature with a real value of £1219 (annualised return of just under 1%). There would also be a small amount from the coupons (which would also increase with inflation) that can be reinvested (tricky with only £1000 worth of gilts) or used as income.

Even at issue, the bonds have a price (and yield) determined by the market.

aldershot

OldScientist said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

Ok, I'll modify my statement.

IL gilts tend to behave counterintuitively in times of unexpected inflation. In order to control inflation, interest rates and real yields will generally rise. Because, as you have pointed out, IL gilts have long duration, their price can, and did, drop like a stone. If, as you point out, you buy at a zero real yield and hold to maturity, you will get a CPI adjusted return of zero at maturity. 

Over the long run, IL gilts have tended to perform well in times of falling inflation and badly in times of rising inflation. They are much more sensitive to changes in interest rates, because of their long duration, than inflation. This is not what many retail investors understand.

If you had thought in 2021, all this covid liquidity sloshing around is going to cause an inflationary spike and i need to protect my portfolio so I'll buy some IL gilts to cover me, it was a disaster. OK, you can hold on for 20 years , but who wants to buy an investment at 100, and see it worth 70 a few months later? If you really want long term inflation protection, just hold equities. 

MK62

......but there's no guarantee equities will protect against inflation.......they have for long periods historically, but there are also a few long periods when they haven't, generally speaking of course (the noughties for example).

The thing with IL gilts, is that as long as you don't buy when the real yield is negative, your investment is guaranteed to be inflation protected (currently RPI), provided, as stated before, that you hold until maturity........well as guaranteed as you can get anyway. This is not necessarily true if you buy an IL gilt fund.

EDIT, for clarity, added "provided, as stated before, that you hold until maturity"......as it's rather a key point.

michaels

aldershot said:

OldScientist said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

Ok, I'll modify my statement.

IL gilts tend to behave counterintuitively in times of unexpected inflation. In order to control inflation, interest rates and real yields will generally rise. Because, as you have pointed out, IL gilts have long duration, their price can, and did, drop like a stone. If, as you point out, you buy at a zero real yield and hold to maturity, you will get a CPI adjusted return of zero at maturity. 

Over the long run, IL gilts have tended to perform well in times of falling inflation and badly in times of rising inflation. They are much more sensitive to changes in interest rates, because of their long duration, than inflation. This is not what many retail investors understand.

If you had thought in 2021, all this covid liquidity sloshing around is going to cause an inflationary spike and i need to protect my portfolio so I'll buy some IL gilts to cover me, it was a disaster. OK, you can hold on for 20 years , but who wants to buy an investment at 100, and see it worth 70 a few months later? If you really want long term inflation protection, just hold equities. 

I can see how we were taking at cross purposes. 

My perspective might be that I want to cover the equivalent of the state pension between retirement and state pension age - ie I am looking for a cash flow of 11,500 in real terms once a year for x years.  I can guarantee this cashflow by investing the appropriate sums in a ladder of index linked gilts expiring at the moments I need the cash flow.  Any other instruments (or indeed duration of linkers) and I am running a risk that the amount I have 'invested' to achieve this outcome is insufficient.

[Of course a fixed duration CPI annuity would achieve the same result]

OldScientist

aldershot said:

OldScientist said:

aldershot said:

michaels said:

Umm - MMF do not provide protection against inflation.

In recent history (the last 3 years) they have seen considerable real terms losses.

They work to reduce overall volatility in a portfolio but they leave inflation risk so personally I think index linked gilts (laddered to match your withdrawal profile) are a better volatility hedge.

Index linked gilts do not provide protection against unexpected inflation. They are very complex beasts with lots of assumptions and moving parts. L&G index linked fund is down around 35% over the past 3 years, with the vast majority of that in the period when inflation took off. 

As others have said, this is the difference between a fund and a ladder. The bond fund is down in value not because of inflation, but because it has a high duration and interest rates rose (of course, one could argue that interest rates rose because of inflation!). 

Holding individual inflation linked gilts to maturity gives inflation protection dependent on the real yield at the time of purchase. So, purchasing a a gilt with 0% real yield will provide protection against inflation provided the gilt is held to maturity.

Ok, I'll modify my statement.

IL gilts tend to behave counterintuitively in times of unexpected inflation. In order to control inflation, interest rates and real yields will generally rise. Because, as you have pointed out, IL gilts have long duration, their price can, and did, drop like a stone. If, as you point out, you buy at a zero real yield and hold to maturity, you will get a CPI adjusted return of zero at maturity. 

Over the long run, IL gilts have tended to perform well in times of falling inflation and badly in times of rising inflation. They are much more sensitive to changes in interest rates, because of their long duration, than inflation. This is not what many retail investors understand.

If you had thought in 2021, all this covid liquidity sloshing around is going to cause an inflationary spike and i need to protect my portfolio so I'll buy some IL gilts to cover me, it was a disaster. OK, you can hold on for 20 years , but who wants to buy an investment at 100, and see it worth 70 a few months later? If you really want long term inflation protection, just hold equities. 

All your statements only really apply to bond funds since they never mature (individual bonds held in the fund do mature, but new ones are always added in a rolling program).

As you correctly state, the duration indicates how sensitive the bond fund is to changes in yields. By far the most common index fund is one which contains all UK inflation linked gilts weighted by the amounts outstanding (e.g., the Aviva fund mentioned up thread, or https://www.vanguardinvestor.co.uk/investments/vanguard-uk-inflation-linked-gilt-index-fund-gbp-acc/overview, etc.) - this type of fund currently has a modified duration of about 15 and is, therefore, sensitive to future changes in yield. However, other index funds with shorter durations are available , e.g., iShares Up to 10 Years Index Linked Gilt Index Fund which has a modified duration of 5.5, so is much less sensitive to changes in yields.

As you rightly say, individual bonds will also change in price as yields change depending on their duration (which currently ranges from close to zero to nearly 30), but this doesn't matter* provided you hold to maturity because you know that the price will be exactly 100 when it matures.

* Except where coupons are reinvested. With yields going up and prices coming down, the reinvested coupons buy more bonds and therefore the total return will actually be higher than expected at purchase (and vice versa for falling yields and rising prices). Given that coupons currently tend to be quite small with ILG, this is a relatively small effect.

Where you have a known real liability (e.g., delivering retirement income), then this makes individual inflation linked gilts ideal since you are certain (absent government default) that they will deliver exactly the inflation adjusted income you have planned for. No other tool commonly available to retail investors will do this.

Two points about equities,
1) Buying now at 100 could easily see the price at 70 (or less) a few months down the line. For example, the UK stock market in 1973 to 1974 or the US market in 1928-29.
2) While equity returns tend to be higher than inflation, historically for UK stocks there have been a few 25 year periods where this has not been the case. For shorter periods, returning less than 0% real is more common, e.g., about 10% of 15 year rolling periods have returned less than 0% real in the UK. For 5 year periods this is more like 20% with real annualised return in the worst cases of about -18% (period starting 1970) and -13% (period starting 1916). Of course, this is why common advice is to hold equities for at least 5 years and preferably much longer.

Pat38493

The original questions here were about money market funds.

To my understanding, MMF and bond (funds) are not interchangable.  Bonds should not be seen as short term investments, but rather as diversifying factors in the portfolio that should provide, most of the time, reduced volatility, and in the times when they do become volatile it should hopefully not coincide with the same times that equities were volatile.  MMF would be more for short term (<2-3 years) most of the time.  MMF have come into focus in the last 2 years because of the rare situation that they were giving returns > inflation.

MK62

....probably more to do with a poor 2022 for equities and a very poor 2022 for bonds, generally speaking......(ST)MMFs are giving > inflation returns atm, but that's only been through the last 10 months or so (and less than that if you use RPI as the benchmark).....