Rearranging gilts: deckchairs on the Titanic?

aroominyork

OldScientist said:

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.

I didn't know there was an <10 year gilt fund. Is that GBPG (which doesn't seem to fit 3.8 year duration)? It's the only one I can find. 

I've nearly finished drafting my retirement strategy which I post on a new thread for people to critique (and possibly pull to bits).

masonic

There's the iShares up to 10 year open ended funds. Both linker and nominal varieties (as I discovered to my chagrin when I looked up the wrong one once).

I hold the linker one, but blend an 'all stocks' and MMF for nominal.

On a total return basis, over 1, 3 and 6 months the nominal gilt index fund has been slightly positive/flat, so things could be worse. I was tempted to go shopping when yields hit a high recently, but I have decided to sit on my hands. I've already done more than enough tinkering this year. I shouldn't push my luck.

OldScientist

aroominyork said:

OldScientist said:

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.

I didn't know there was an <10 year gilt fund. Is that GBPG (which doesn't seem to fit 3.8 year duration)? It's the only one I can find. 

I've nearly finished drafting my retirement strategy which I post on a new thread for people to critique (and possibly pull to bits).

I was thinking of the ishares one - but the Goldman Sachs is following a similar, but not identical, index (1 to 10 years rather than 0 to 10 years of ishares) that would on average have a duration larger by about 0.5. I also note that the document you linked is from the end of last year, so the duration is out of date and, unfortunately, morningstar is not reporting the duration of the GBPG. However, according to morningstar, as of 18 September, it was holding 39% in the range 1 to 3 years, 41% 5 to 7 years, and 21% 7 to 10 years, which gives a approximate weighted average maturity of around the 4.9 year mark (the weighted duration would be a bit lower than that, say 4.5, but it depends on the issue weights of individual bonds).

AFAIK, the under 10 year index FTSE index is a fairly recent addition -  IIRC, it was introduced three(?) years ago. I suspect the motivation was to provide gilt funds with intermediate maturities once yields started to rise.