Index linked gilts and index linked annuities: are you moving money into them, yea or nay?

Bobziz

Surely it's not about predicting inflation, it's about deciding which redemption value you want to guarantee, nominal or real?

zagfles

Hoenir said:

zagfles said:

Hoenir said:

In 2022 plenty of people who thought that they understood ILG's came unstuck. Certainly far from being straightforward to comprehend. From my personal perspective best left to pension funds or as part of a managed portfolio. More than happy to stick to conventional Gilts where there's complete certainty as to the outcome. 

IL gilts may take a bit of getting your head around but really aren't that complicated for anyone who's capable of managing investments. And there's no certainty of how much a conventional gilt will really be worth in the future. 

I've been managing my own investments for many decades.  Conventional Gilts offer 100% certainty as to their redemption value. There's always a trade that gets jumped on as the latest version of sliced bread.  Trouble is the market efficiently remove the edge. If you can predict future inflation and interest rate movements with any degree of certainty then your confirmation bias post may well be proven to be correct. 

You really don't get it. Read the thread. This isn't about trying to get an "edge", or about predicting the future. It's about liability matching. Your future spending needs are likely to rise with inflation. 

Hoenir

zagfles said:

Hoenir said:

zagfles said:

Hoenir said:

In 2022 plenty of people who thought that they understood ILG's came unstuck. Certainly far from being straightforward to comprehend. From my personal perspective best left to pension funds or as part of a managed portfolio. More than happy to stick to conventional Gilts where there's complete certainty as to the outcome. 

IL gilts may take a bit of getting your head around but really aren't that complicated for anyone who's capable of managing investments. And there's no certainty of how much a conventional gilt will really be worth in the future. 

I've been managing my own investments for many decades.  Conventional Gilts offer 100% certainty as to their redemption value. There's always a trade that gets jumped on as the latest version of sliced bread.  Trouble is the market efficiently remove the edge. If you can predict future inflation and interest rate movements with any degree of certainty then your confirmation bias post may well be proven to be correct. 

You really don't get it. Read the thread. This isn't about trying to get an "edge", or about predicting the future. It's about liability matching. Your future spending needs are likely to rise with inflation. 

I was responding to the post made. Not least the comparison to a Conventional Gilt that doesn't even exist . That's how social media perpetuates investment myths. 

How can you be certain that an ILG will provide a return that matches your personal rate of inflation?  (The current basket of goods bears no resemblance to my expenditure). 

zagfles

Hoenir said:

zagfles said:

Hoenir said:

zagfles said:

Hoenir said:

In 2022 plenty of people who thought that they understood ILG's came unstuck. Certainly far from being straightforward to comprehend. From my personal perspective best left to pension funds or as part of a managed portfolio. More than happy to stick to conventional Gilts where there's complete certainty as to the outcome. 

IL gilts may take a bit of getting your head around but really aren't that complicated for anyone who's capable of managing investments. And there's no certainty of how much a conventional gilt will really be worth in the future. 

I've been managing my own investments for many decades.  Conventional Gilts offer 100% certainty as to their redemption value. There's always a trade that gets jumped on as the latest version of sliced bread.  Trouble is the market efficiently remove the edge. If you can predict future inflation and interest rate movements with any degree of certainty then your confirmation bias post may well be proven to be correct. 

You really don't get it. Read the thread. This isn't about trying to get an "edge", or about predicting the future. It's about liability matching. Your future spending needs are likely to rise with inflation. 

I was responding to the post made. Not least the comparison to a Conventional Gilt that doesn't even exist . That's how social media perpetuates investment myths. 

It was an example!

How can you be certain that an ILG will provide a return that matches your personal rate of inflation?  (The current basket of goods bears no resemblance to my expenditure). 

I'm not "certain". Which is why I used the word "likely". It's a lot more likely that my spending requirements will rise with RPI/CPIH inflation that they'll not rise at all, or rise by some completely unrelated amount. Variations in personal inflation is constantly used as an excuse to ignore inflation by people who don't understand it, or don't understand how to cope with it. Reality is that over the longer term, personal inflation will likely be similar to published inflation indicies, though short term they may vary a bit as some items eg fuel can be quite volatile. 

Anyway, we're through, don't want to further clutter a useful thread. 

SnowMan

Hoenir said:

I was responding to the post made. Not least the comparison to a Conventional Gilt that doesn't even exist . That's how social media perpetuates investment myths.

Are you referring to the fact that for simplicity I assumed the conventional gilt was zero coupon? Fair point.

So let's instead base it on the actual conventional gilt that I was simplifying (TG44) allowing for the actual coupons. And to make sure we don't understate the value of the conventional gilt we will assume reinvestment of the coupons is at inflation + 1.5% (same as the ILG) in the 6% inflation scenario. Then this is the revised comparison. And even with these assumptions, assumptions  that overstate Connie's likely investment proceeds, she still can't afford her food, energy and petrol in the 6% inflation scenario.

All the assumptions are based on the actual pricing and yields of these two gilts at yesterday's close. And the figures are tweeked to what the equivalent gilt with exactly 20 years outstanding term would return.

SnowMan

Big price fall and corresponding increase in UK real yields on index linked gilts at the longer terms yesterday; a knock on effect of the German chancellor’s increased spending plans announced yesterday.
Real yields (above CPIH and RPI pre 2030) now just above 2%pa at the roughly 25 year term to maturity based on yesterday’s closing prices according to my calculations. And prices have fallen further this morning.

This chart shows annualised real gross redemption yields by outstanding term based on those closing prices. An opportunity to lock in some reasonable 25 year real returns for those buying and holding to maturity.

Ciprico

Snowman, I also have steered away from ILG as never understood them, though having just retired have invested heavily in short term Gilts and am curious about ILG.

I understand it is true to say that if you hold to maturity, and you buy at parity, you get the coupon (generally low) + RPI (unknown)

...but as you can't buy at parity, and the price you pay has a lot if the RPI element baked in (dirty price ?) - how do you get any certainty...

....apart from the coupon is all the gain capital gain (tax free)

TheGreenFrog

Ciprico said:

Snowman, I also have steered away from ILG as never understood them, though having just retired have invested heavily in short term Gilts and am curious about ILG.

I understand it is true to say that if you hold to maturity, and you buy at parity, you get the coupon (generally low) + RPI (unknown)

...but as you can't buy at parity, and the price you pay has a lot if the RPI element baked in (dirty price ?) - how do you get any certainty...

....apart from the coupon is all the gain capital gain (tax free)

If you look for the clean price then as long as that is at or better than 100 then you will be making RPI (CPIH after 2030) plus an additional return (you can also get positive return with a clean price over 100 but that requires highish coupon).  If you look on www.yieldgimp.com you will see that this post inflation return is calculated for you under the column "real yield".   

SnowMan

Ciprico said:

I understand it is true to say that if you hold to maturity, and you buy at parity, you get the coupon (generally low) + RPI (unknown)

...but as you can't buy at parity, and the price you pay has a lot if the RPI element baked in (dirty price ?) - how do you get any certainty...

Probably easiest to explain with an example, I'll assume a purchase now of the 2051 maturity TG51.

Let's compare cashflows, your outlay by way of the purchase price vs your maturity proceeds and coupons. Here's a chart of those (not to scale)

As you can see the clean price of £61.65 is less than the original £100 nominal. But note also the clean price + indexation that makes up most of the dirty price is less than the original £100 nominal plus indexation to date, because the 33.295% uplift on £100 is more than the 33.295% uplift on £61.65.

The amount that the maturity proceeds (and coupons) exceed the purchase price is partly your future inflationary return and partly your real return. 

Note that the blue box is future inflation on the £133.30 (= 100 + 33.30) so automatically more than covers future inflation on the purchase price £82.18 (= 61.65 + 20.53). And then the left over bit of the blue box, plus the bigger green box (100 less 61.65), the bigger fawn box (33.30 less 20.53) and the excess value of coupons over accrued interest form your real return over inflation.

When you crunch the numbers you end up with a roughly 2% real return. There is a relatively small assumption involved that the coupons can be reinvested at the same real return of 2% but that's not a major thing as the coupons are relatively small. But if that assumption is correct then you will achieve a real gross return as shown on yieldgimp of about 2% currently. 

SnowMan

Ciprico said:

....apart from the coupon is all the gain capital gain (tax free)

Yes the capital gain (difference between maturity amount and purchase price) on government index linked gilts is tax free

The coupon is taxable as interest if held in a taxable account.