Rearranging gilts: deckchairs on the Titanic?

aroominyork

Luckily, perhaps, only 20% of my fixed interest holdings are in a gilt index fund (the rest is global aggregate, corporate and a 2029 linker) but it's still not much fun watching it drift lower and lower. I'm tempted to move it into a nominal gilt of similar duration, something like TR33, to lock in the current yield. Or maybe some more T29 ILG while inflation remains sticky and indexing is still based on RPI. Your thoughts and wisdom please...?

Linton

Why are you holding the gilt index fund? What strategy are you fillowing for your investments and how does the quite large gilt fund holding fit into it? Has anything changed since you set it up?

What ever you do I suggest you dont base it on short term considerations.  Fiddlng with 20% of a portfolio presumably designed to provide security for the next 40 years or whatever based on the difference between RPI and CPI over the next 4 years seems foolish and a waste of time to me.

aroominyork

What’s changed is that we are entering drawdown so gilts now have a dual purpose of managing portfolio volatility and also being a source of income when the cash bucket is empty (though that wouldn’t be for a few years), especially if equity markets are down.

I’m interested that you call 20% of fixed income a “quite large gilt fund holding”. For UK investors, I consider a gilt index fund a natural, almost default, place to invest their fixed interest.

Linton

My take is that if you are entering drawdown with a long term income strategy for which a gilt fund forms a key component you should be starting that strategy now.  Trying to get a relatively unimportant extra fraction of a % on the side in the short term is a diversion.  If you need greater returns better to set up your allocations at the strategic level to provide them.

My policy is that nothing is a natural default holding.  Every holding needs to be justified in terms of objectives and strategy for achieving them.  Having no justification for holding gilts, I don't.

aroominyork

I’ve been thinking I should put a drawdown strategy on paper. Your post has given me the final push to do that. Watch this space…

howard3844

I hold 3 individual Gilts to maturity for the next 3 years income. Any longer gilt will always fluctuate in price depending on prevailing expectation of future interest rates (which nobody can predict). The longer duration the more volatile the daily price but fixed if held to maturity.

OldScientist

aroominyork said:

What’s changed is that we are entering drawdown so gilts now have a dual purpose of managing portfolio volatility and also being a source of income when the cash bucket is empty (though that wouldn’t be for a few years), especially if equity markets are down.

I’m interested that you call 20% of fixed income a “quite large gilt fund holding”. For UK investors, I consider a gilt index fund a natural, almost default, place to invest their fixed interest.

Bond fund volatility is dependent on modified duration - the general ('all stocks') nominal gilt index holds all available gilts and currently has a duration of 7.7 (i.e., a 1 percentage point increase in yields will lead to a 7.7% drop in NAV and vice versa), while the under 5 year and under 10 year gilt indices have modified durations of 2.1 and 3.8, respectively and, therefore, lower volatility. Lower maturities will typically also have lower yields and long term returns.

FWIW, in retirement we hold fixed income as cash in two one year fixed rate accounts, a short term global bond fund and a longer term global bond fund such that the average duration lies between 1 and 2.

SloughSally

So would I correctly assume that today’s news of the massively ballooning UK debt and the BoE only reducing the stock of gilts by £70 billion instead of the planned £100 billion is bad news for people who hold such funds as VL20 ,VL40 etc?
Thank You.

SloughSally

I ask the above in terms of the fund price, not the obvious negative impact on the UK it is creating.

aroominyork

You can see it as a simple matter of supply and demand. The govt needs to issue more debt, which reduces the space for the BoE to sell the debt it holds back into the market. So supply of gilts increases, lower confidence in the UK economy/govt likely reduces demand, and that means higher yields have to be offered which reduces prices of existing debt, including VLS20/40. 

QrizB

howard3844 said:

I hold 3 individual Gilts to maturity for the next 3 years income. Any longer gilt will always fluctuate in price depending on prevailing expectation of future interest rates (which nobody can predict). The longer duration the more volatile the daily price but fixed if held to maturity.

I'm doing something similar.
There's inflation risk with nominal gilts, and potentially lower returns on index-linked ones. But you know what you'll get at the end.