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    • Reluctantpensioner
    • By Reluctantpensioner 11th Aug 18, 4:20 AM
    • 65Posts
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    Reluctantpensioner
    Any views on the relevance of Gilts in a modern portfolio?
    • #1
    • 11th Aug 18, 4:20 AM
    Any views on the relevance of Gilts in a modern portfolio? 11th Aug 18 at 4:20 AM
    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.
Page 1
    • LobsterMemory
    • By LobsterMemory 11th Aug 18, 7:52 AM
    • 80 Posts
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    LobsterMemory
    • #2
    • 11th Aug 18, 7:52 AM
    • #2
    • 11th Aug 18, 7:52 AM
    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
    • By A_T 11th Aug 18, 9:12 AM
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    A_T
    • #3
    • 11th Aug 18, 9:12 AM
    • #3
    • 11th Aug 18, 9:12 AM
    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
    • By Glen Clark 11th Aug 18, 9:28 AM
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    Glen Clark
    • #4
    • 11th Aug 18, 9:28 AM
    • #4
    • 11th Aug 18, 9:28 AM
    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
    • By dunstonh 11th Aug 18, 1:55 PM
    • 96,122 Posts
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    dunstonh
    • #5
    • 11th Aug 18, 1:55 PM
    • #5
    • 11th Aug 18, 1:55 PM
    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). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
    • bostonerimus
    • By bostonerimus 11th Aug 18, 2:16 PM
    • 2,454 Posts
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    bostonerimus
    • #6
    • 11th Aug 18, 2:16 PM
    • #6
    • 11th Aug 18, 2:16 PM
    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.
    Last edited by bostonerimus; 11-08-2018 at 2:22 PM.
    Misanthrope in search of similar for mutual loathing
    • kidmugsy
    • By kidmugsy 11th Aug 18, 2:30 PM
    • 12,223 Posts
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    kidmugsy
    • #7
    • 11th Aug 18, 2:30 PM
    • #7
    • 11th Aug 18, 2:30 PM
    I hold gilt funds because for a UK investor (along with US and Japan treasuries) they are the most negatively correlated asset to equities.
    Originally posted by A_T
    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
    • By A_T 11th Aug 18, 2:57 PM
    • 570 Posts
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    A_T
    • #8
    • 11th Aug 18, 2:57 PM
    • #8
    • 11th Aug 18, 2:57 PM
    Not "are": 'have been'. Whether they will be negatively correlated in the event of a big drop on Wall St remains to be seen.
    Originally posted by kidmugsy
    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
    • By Thrugelmir 11th Aug 18, 4:26 PM
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    Thrugelmir
    • #9
    • 11th Aug 18, 4:26 PM
    • #9
    • 11th Aug 18, 4:26 PM
    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.
    Originally posted by A_T
    DMO appears to have no problem in issuing new stock. Ten year stock at 1.625% at just over par value.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • A_T
    • By A_T 11th Aug 18, 4:51 PM
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    A_T
    DMO appears to have no problem in issuing new stock. Ten year stock at 1.625% at just over par value.
    Originally posted by Thrugelmir
    And new issues are always hugely oversubscribed.
    • dividendhero
    • By dividendhero 11th Aug 18, 6:23 PM
    • 288 Posts
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    dividendhero
    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
    • kidmugsy
    • By kidmugsy 11th Aug 18, 7:44 PM
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    kidmugsy
    In today's chase-for-growth culture gilt funds are very unfashionable
    Originally posted by A_T
    Good Lord, I wouldn't buy a gilt fund. When we held gilts they were actual gilts.

    UK government debt is still growing and one day the temptation to give gilt holders a "haircut" will prove too great
    Originally posted by dividendhero
    Any haircut is likely to be by inflation. Perhaps buy some gold too.
    Free the dunston one next time too.
    • A_T
    • By A_T 11th Aug 18, 8:12 PM
    • 570 Posts
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    A_T
    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
    Originally posted by dividendhero
    If things get to that stage then the value of gilts will be the least of our problems.
    • dividendhero
    • By dividendhero 11th Aug 18, 8:30 PM
    • 288 Posts
    • 301 Thanks
    dividendhero
    If things get to that stage then the value of gilts will be the least of our problems.
    Originally posted by A_T
    The haircut on gilts will be done by simply creating inflation
    • Linton
    • By Linton 11th Aug 18, 8:52 PM
    • 10,090 Posts
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    Linton
    DMO appears to have no problem in issuing new stock. Ten year stock at 1.625% at just over par value.
    Originally posted by Thrugelmir

    You may as well use NS&I PBs and fixed rate accounts for similar rates at zero risk. I would not hold gilts at the moment as it seems to me that there is too much risk for minimal benefit.
    • Reluctantpensioner
    • By Reluctantpensioner 12th Aug 18, 5:14 PM
    • 65 Posts
    • 31 Thanks
    Reluctantpensioner
    What gilts have you got?
    Originally posted by dunstonh
    I've held the following for several years.
    Aviva Index-Linked Gilt S6 Pen
    Aviva Long Gilt S6 Pen
    L&G PMC >5 Yrs IdxLnkd Glts Idx 3 Pen
    L&G PMC(LGIM) >15 Yrs Gilts Index Pen

    I am currently consolidating all my investments. L&G are sold, Aviva will go later in the year.
    This requires me to examine every holding in my portfolio, and their relative weightings.
    The performance of Gilts at the moment, and the outlook reports I've read, makes me think I should lower the weighting. (I was never thinking of dropping them altogether, though I have seen balanced portfolios without them).
    Corporate bonds have reduced a little and high yield bonds slightly increased. But you don't mention them.
    Originally posted by dunstonh
    Only so the question was kept simple. Yes, I have Corporate, High Yield and Global in the portfolio.

    Arguably I should have phrased it differently:
    Are you lowering the weighting of Gilts, and what are you replacing them with?
    They are off the boil, are they going to come on again? Hold or Switch.
    • Thrugelmir
    • By Thrugelmir 12th Aug 18, 5:27 PM
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    Thrugelmir
    You may as well use NS&I PBs and fixed rate accounts for similar rates at zero risk. I would not hold gilts at the moment as it seems to me that there is too much risk for minimal benefit.
    Originally posted by Linton
    Depends how much cash you are holding.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • Thrugelmir
    • By Thrugelmir 12th Aug 18, 5:32 PM
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    Thrugelmir
    And new issues are always hugely oversubscribed.
    Originally posted by A_T
    Currently is the word I would use. ECB and BOJ aren't going to maintain buyback policies indefinately.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
    • schiff
    • By schiff 13th Aug 18, 2:56 PM
    • 18,289 Posts
    • 9,733 Thanks
    schiff
    This is a headline from Trustnet:

    "LGIM asset allocation head: The end of the “spectacular bull market” is coming closer
    13 August 2018

    Emiel van den Heiligenberg and other experts at LGIM explain why investors would be wise to start preparing for the end of the bull run."

    That, and the comments in this thread, have made me think!

    My largest investment is in a £ Strategic Bond. I have the equivalent in accessible cash. It has lost me money (capital value down 8% in the last year) but I have not been bothered enough to do something about it; I know I should have. It is in an ISA and produces on current values about 4% pa. Income is paid out quarterly and is large enough to meet some of my heavier bills that occur at the same sort of time. So, it is 'convenient'.

    I have a similar sum in S&S Funds ISAs - in Fidelity and Co-Funds.

    Rather than move my Strategic Bond money to something more exciting which is tempting, like one of the Vanguard LifeStrategy funds, which I know I shouldn't because of my age, it could be better to move it to a better performing collection of Bond Funds.

    I would be happy with 4% income and a bit of modest growth. Is there something out there that would fit the bill?

    And my final point going back to those headlines, if in fact that scenario is likely, coupled with the comments on this thread, IF that is how it turns out, what effect would it have on the market price of the corporate and government bonds in which my Bond is invested? Up or down?
    • Thrugelmir
    • By Thrugelmir 13th Aug 18, 6:30 PM
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    Thrugelmir

    And my final point going back to those headlines, if in fact that scenario is likely, coupled with the comments on this thread, IF that is how it turns out, what effect would it have on the market price of the corporate and government bonds in which my Bond is invested? Up or down?
    Originally posted by schiff
    Ultimately the bonds your manager holds will mature. If you bought in at a price higher than par. Then you'll suffer a capital loss. More noticable if you are withdrawing the income rather than reinvesting. The bond markets like the equity markets have had a sustained bull run (though over many decades). There's few places to shelter if you expect a fall out.
    Financial disasters happen when the last person who can remember what went wrong last time has left the building.
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