Any views on the relevance of Gilts in a modern portfolio?

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Reluctantpensioner
Reluctantpensioner Posts: 140 Forumite
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in Savings & investments
I've been watching my Gilt holdings give negative returns for two years now.
But a significant chunk of Gilts (often 50:50 or 66:33 Gilt:index-Linked) have always been present on "model portfolios".
Recently however, I've seen portfolios with no Gilts and replacing them with "Alternative investments" including Gold, Target Return and Hedge Funds.
Any thoughts?

BTW: I am aware that a loss-making asset might still provide diversity to keep a portfolio's overall risk low. I'm not panicking, just wondering.
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  • LobsterMemory
    LobsterMemory Posts: 439 Forumite
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    I use them to keep my portfolio to my desired risk level

    I started my SIPP 10 years ago with an asset allocation of

    Shares 70%, Gilts 15% Property 15%

    Every 5 years I reduce the Shares element by 5%, increasing the other 2, so this year I'll be at

    Shares 60% Gilts 20% Property 20% and so on

    Every year I rebalance to keep to those proportions. Last 5 years went

    2014 Sell Property Buy Shares & Gilts
    2015 Sell Property Buy Shares & Gilts
    2016 Sell Gilts Buy Shares & Property
    2017 Sell Shares Buy Gilts & Property
    2018 Perfect harmony!

    I see it as selling off assets that are frothy and buying assets that are currently out of favour waiting for their whoosh. Whether that's tosh, I don't know and don't keep records that will tell me one way or another. I can at least make a case for it sounding sensible even if I don't have figures to gauge the actual effectiveness!

    PS If I was starting again, I probably wouldn't have property as a separate class

    PPS I wouldn't swap my gilts for Gold, Target Return and Hedge Funds.(or Index linked Gilts for that matter) as I don't understand them
  • A_T
    A_T Posts: 959 Forumite
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    I hold gilt funds because for a UK investor (along with US and Japan treasuries) they are the most negatively correlated asset to equities.
  • Glen_Clark
    Glen_Clark Posts: 4,397 Forumite
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    A small investor prepared to shop around can get a better rate on retail savings accounts than gilts.
    “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” --Upton Sinclair
  • dunstonh
    dunstonh Posts: 116,376 Forumite
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    I've been watching my Gilt holdings give negative returns for two years now.

    What gilts have you got?

    Index linked should be showing a marginal profit and normal gilts a marginal loss over two years. Most of the loss on normal gilts followed the referendum result but have been stable with slight growth since then.

    Our model portfolio allocations (which are fluid based on economic data) have seen index linked gilt allocations reduce but normal gilts much the same. Corporate bonds have reduced a little and high yield bonds slightly increased. But you dont mention them.
    But a significant chunk of Gilts (often 50:50 or 66:33 Gilt:index-Linked) have always been present on "model portfolios".

    That is because their reduced volatility level allows the risks to be taken in other parts of the portfolio. A crash on gilts is 5%. A crash on equities is 20%.
    Recently however, I've seen portfolios with no Gilts and replacing them with "Alternative investments" including Gold, Target Return and Hedge Funds.

    And do these other portfolios have the same risk profile? For example, we have a 1-10 scale with portfolios covering 3 to 10. Not all the portfolios have gilts or index linked gilts.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • bostonerimus
    bostonerimus Posts: 5,617 Forumite
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    edited 11 August 2018 at 2:22PM
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    Gilts and bonds are there to reduce overall portfolio volatility, they should be a low risk store of wealth with a high probability of giving returns that are uncorrelated from equities. They sit along side a cash allocation that might be in easy access and long term saving accounts ladder.

    Over the last 30 years my bond allocation has average a 5.8% annual return, but over the last 2 years it's just 1%. Current low rates that are probably going to creep up......maybe not so much in the UK with Brexit.....are going to mean low returns from bonds, but they will still be useful to dampen equity volatility. So I'd keep a broad selection of UK bonds, corporate and gilts, and probably add some global bonds too.

    As long as you hold bond funds for long enough and reinvest interest you'll probably do ok, or just buy individual bonds and hold to maturity. Gold is volatile and hedge funds are expensive and who knows what risks they take.....so don't go with the latest fashion, stick with common sense and basic asset allocation.

    Remember you should not be looking for the most gains possible from a portfolio, you should design it to give the highest probability that it will allow you to meet your financial goals.
    “So we beat on, boats against the current, borne back ceaselessly into the past.”
  • kidmugsy
    kidmugsy Posts: 12,709 Forumite
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    A_T wrote: »
    I hold gilt funds because for a UK investor (along with US and Japan treasuries) they are the most negatively correlated asset to equities.

    Not "are": 'have been'. Whether they will be negatively correlated in the event of a big drop on Wall St remains to be seen.
    Free the dunston one next time too.
  • A_T
    A_T Posts: 959 Forumite
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    kidmugsy wrote: »
    Not "are": 'have been'. Whether they will be negatively correlated in the event of a big drop on Wall St remains to be seen.

    Research has shown that when investors are selling equity fund ETFs they are buying gilt fund ETFs. For a 3 month period at the start of this year when equities wobbled UK Gilt Funds were the best performing IA sector.

    In today's chase-for-growth culture gilt funds are very unfashionable but when Wall Street crashes the FTSE will crash too. Investors will run to government for shelter. Probably no greater certainty in investing.
  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
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    A_T wrote: »
    In today's chase-for-growth culture gilt funds are very unfashionable but when Wall Street crashes the FTSE will crash too. Investors will run to government for shelter. Probably no greater certainty in investing.

    DMO appears to have no problem in issuing new stock. Ten year stock at 1.625% at just over par value.
  • A_T
    A_T Posts: 959 Forumite
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    Thrugelmir wrote: »
    DMO appears to have no problem in issuing new stock. Ten year stock at 1.625% at just over par value.

    And new issues are always hugely oversubscribed.
  • dividendhero
    dividendhero Posts: 2,417 Forumite
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    Call me a cynic, but in my experience most people own gilts simply because have to, eg pension funds have to hold them due to regulations.

    Personally I wouldn't touch them with a bargepole, UK government debt is still growing and one day the temptation to give gilt holders a "haircut" will prove too great
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