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More on Index Linked

Gilts, bonds, and interest-bearing shares
SDN123
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More on Index Linked

#160130

Postby SDN123 » August 16th, 2018, 2:38 pm

Hi Everyone,

Looking for some advice and/or ideas.

I'm saving for retirement and have a passive portfolio loosely based on Tim Hales' books. I target 75% equities : 25% fixed interest - although I am considering increase the % fixed interest as I near my financial targets. My retirement plans are very fluid but I expect to effectively retire in the UK in 6 to 10 years.

I hold individual gilts / IL-gilts and also gilt and IL gilt funds. For convenience as much as anything (I'm currently an expat and so telephone trading for individual gilts is a pain) my recent fixed interest purchases have been funds. I also hold a few individual corporate bonds but I'm slowly moving out of those as I want to restrict any excitement to the equities part of my portfolio and keep the fixed interest as boring as possible. I trade on Interactive Investor (ISA) and iWeb (taxable trading account).

I'm worried about both mid-term inflation and mid-term interest rate rises... so I'm targeting having the fixed interest be 50% gilts : 50% index-linked gilts. At the moment my percentages have "slipped" away from I-L instruments and I'm approximately 60% conventional and 40% I-L . The reason for this is all of the passive I-L gilt trackers that I can find have a very long duration (tracker funds or ETF's - I don't mind). For example Vanguard U.K. Inflation-Linked Gilt Index Fund has a duration of over 20 years.

I have a reasonable chunk of cash to invest in fixed interest at the moment.

So I think that I have some choices:
1. Don't worry about the gilts : I-L gilts ratio and invest in a gilt tracker of reasonably low duration.
2. Don't worry about the duration and invest in a I-L gilt tracker of reasonably high duration.
3. Invest directly in an individual I-L gilt or two - probably one maturing in around 5 - 10 years.
4. Look at shorter duration I-L bond tracker funds outside of GBP (maybe a TIPs tracker).
5. Look at shorter duration active I-L bond funds still in GBP (but I do feel slightly sick paying more than around 0.2% fees - so I might not have the stomach for this option)

For simplicity of tax reporting in two countries any bond funds need to be distributing.

I want to know if anyone else has any experience and/or recommendation for either the last two options (4 or 5) - ideally with positives and negatives that they've found. Or just if anyone has any comments !

Thanks in advance,

SDN

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Re: More on Index Linked

#160170

Postby Bluestone77 » August 16th, 2018, 4:40 pm

I see your problem as the typical UK IL funds/ETFs have a duration of around 22 years to match the All UK IL Gilt index.
An alternative may be the iShares $ TIPS 0-5 UCITS ETF (TI5G), which is hedged to UK pounds. TER/OCF is 0.12%. Duration is about 2.7Y. This is a fairly new ETF with a record of only about 1Y. Obviously this will be linked to US inflation, but at least you avoid the currency risk.
It also has a real yield unlike UK IL gilts at about 0.9%.
Info:
https://www.ishares.com/uk/individual/e ... dged-(dist)-fund

The unhedged version is TIP5.

SDN123
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Re: More on Index Linked

#160191

Postby SDN123 » August 16th, 2018, 5:52 pm

Bluestone77 wrote:I see your problem as the typical UK IL funds/ETFs have a duration of around 22 years to match the All UK IL Gilt index.
An alternative may be the iShares $ TIPS 0-5 UCITS ETF (TI5G), which is hedged to UK pounds. TER/OCF is 0.12%. Duration is about 2.7Y. This is a fairly new ETF with a record of only about 1Y. Obviously this will be linked to US inflation, but at least you avoid the currency risk.
It also has a real yield unlike UK IL gilts at about 0.9%.
Info:
https://www.ishares.com/uk/individual/e ... dged-(dist)-fund

The unhedged version is TIP5.


Thanks Bluestone, not one I've seen before and very useful.

What exactly does "hedged" mean in this context? My guess would be:

Jan 1, 2019: I buy GBP 100 of this fund when the (re-based) US inflation index is 100.

Jan 1, 2029: US inflation index is now 1,000. The value of my investment is now GBP 1,000 regardless of the exchange rate at the time.

In between those two dates I get a small, but rising with US inflation, dividend.

Is that right? If not how does it work?

Many Thanks,

SDN

Bluestone77
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Re: More on Index Linked

#160209

Postby Bluestone77 » August 16th, 2018, 8:17 pm

What exactly does "hedged" mean in this context? My guess would be:

Jan 1, 2019: I buy GBP 100 of this fund when the (re-based) US inflation index is 100.

Jan 1, 2029: US inflation index is now 1,000. The value of my investment is now GBP 1,000 regardless of the exchange rate at the time.

In between those two dates I get a small, but rising with US inflation, dividend.

Is that right? If not how does it work?


Yes that's right for hedging where your return will be protected against changes in the USD/GBP exchange rate. So you will not gain if the pound goes down nor lose if it goes up.

There is the caveat that your example describes an individual IL bond held to maturity, not a bond fund/ETF.
There is reinvestment risk for the ETF as the average duration is 2.7Y. Therefore bonds will need to be replaced as the old ones mature. The real interest rate of the new bonds will be whatever the market rate is at the time.
You also lose the benefit of a fixed maturity date with a fund/ETF although the risk here is lessened the shorter the average duration is.
See the link below for more info:
Please note its a fairly old article so cannot comment if the taxation etc. is still up to date but the advantages/disadvantages of individual holdings vs funds/ETFs is still correct.
http://monevator.com/buy-gilts-directl- ... gilt-fund/

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Re: More on Index Linked

#160252

Postby LittleDorrit » August 17th, 2018, 9:49 am

When a similar sugestion came up on this board earlier in the year, I looked for the sterling hedged version of TIP5 on line. I eventually found TP05.L by prodding around on the ishares site, but couldn't find a quote on any of the regular on line platforms and gave up at that point.

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Re: More on Index Linked

#160257

Postby colin » August 17th, 2018, 10:08 am

I'm worried about both mid-term inflation and mid-term interest rate rises


do not make the mistake of thinking that index linked investments are protected from rising interest rates. For that you need something like ishares FLOS etf, or a savings account.

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Re: More on Index Linked

#160262

Postby LittleDorrit » August 17th, 2018, 10:18 am

Sorry TP05 is the unhedged sterling version, but from memory I had the same problem with the hedged.

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Re: More on Index Linked

#160313

Postby SDN123 » August 17th, 2018, 2:01 pm

Bluestone77 wrote:There is the caveat that your example describes an individual IL bond held to maturity, not a bond fund/ETF.

Please note its a fairly old article so cannot comment if the taxation etc. is still up to date but the advantages/disadvantages of individual holdings vs funds/ETFs is still correct.
http://monevator.com/buy-gilts-directl- ... gilt-fund/


Understood. I'm familiar with the link, which is definitely relevant and useful.

Thanks, again.

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Re: More on Index Linked

#160317

Postby SDN123 » August 17th, 2018, 2:13 pm

LittleDorrit wrote:Sorry TP05 is the unhedged sterling version, but from memory I had the same problem with the hedged.


I decided to go for the GPB Hedged version which according to the iShares website is TI5G. I had no problem purchasing on ii.co.uk

The USD version is, I believe, TIP5.

Perhaps there has been a name change? In any case, as I said, TI5G worked for me.

SDN

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Re: More on Index Linked

#160347

Postby SDN123 » August 17th, 2018, 4:47 pm

colin wrote:
I'm worried about both mid-term inflation and mid-term interest rate rises


do not make the mistake of thinking that index linked investments are protected from rising interest rates. For that you need something like ishares FLOS etf, or a savings account.


I do understand that. I expect bond funds to recover from unexpected interest rate changes, but my understanding is that recovery will take about the "Duration" of the bond fund. Which is why I'm worried about the 22 yr duration of all of the I-L Gilt trackers that I can find. My 5 - 10 year time frame to retirement won't let me tolerate that "wait".

SDN

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Re: More on Index Linked

#160365

Postby colin » August 17th, 2018, 6:55 pm

Yes I think in your position if I wanted index linked gilts I would go for the US treasury version hedged to Sterling, the average age to maturity is more in keeping with your requirements, and the return is expected to be higher,also as far as I understand should there be any deflation over your time frame the US government will not cut the capital return accordingly, unlike the mean minded uk government.

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Re: More on Index Linked

#160389

Postby SDN123 » August 17th, 2018, 9:52 pm

colin wrote:Yes I think in your position if I wanted index linked gilts I would go for the US treasury version hedged to Sterling, the average age to maturity is more in keeping with your requirements, and the return is expected to be higher,also as far as I understand should there be any deflation over your time frame the US government will not cut the capital return accordingly, unlike the mean minded uk government.


Well I’ve taken that plunge now! I guess the risk is mega inflation in the UK that doesn’t get matched in the USA (for example we have Brexit and they don’t). On the other hand I’d benefit from mega inflation in the USA and not the UK (they have Trump and we don’t). Of course if I knew the answers to any of that, or even if those factors will be relevant, I’d already be far too rich to care!

As it is I think I’m comfortable with my choice, although I’m still happy to hear other opinions or choices related to my OP.

SDN

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Re: More on Index Linked

#160432

Postby colin » August 18th, 2018, 10:59 am

Well good luck, the most difficult thing is having to make decisions about a future one cannot know.

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Re: More on Index Linked

#160795

Postby richfool » August 20th, 2018, 4:07 pm

In the event of a major correction or bear market in equities, would index linkers and particularly TIPs provide any protection, - i.e. move in the opposite direction?

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Re: More on Index Linked

#160803

Postby scrumpyjack » August 20th, 2018, 4:37 pm

One point to bear in mind, if these 'savings for retirement' are not in a SIPP / Pension plan, is that whilst UK index linked gilts are exempt from Capital Gains Tax, I don't think US ones are. So the 'gains' (reflecting inflation) might be subject to CGT.

I suspect this is not a problem for you as your retirement savings are most likely in a tax free wrapper.

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Re: More on Index Linked

#160819

Postby SDN123 » August 20th, 2018, 6:08 pm

scrumpyjack wrote:One point to bear in mind, if these 'savings for retirement' are not in a SIPP / Pension plan, is that whilst UK index linked gilts are exempt from Capital Gains Tax, I don't think US ones are. So the 'gains' (reflecting inflation) might be subject to CGT.

I suspect this is not a problem for you as your retirement savings are most likely in a tax free wrapper.


Thanks, that is actually a very useful point to note, especially for me as I'm currently working abroad. As it happens this "free money" was already inside an ISA and so CGT doesn't apply. However I cannot subscribe new money to ISAs while I'm overseas and can only subscribe a little to my SIPP each year (GBP 3,6800 gross, 2,880 net per annum). I plan to retire in the UK and I so buy investments in a non-sheltered UK dealing account that allows such things. I'll have to consider future CGT issues when I next need to buy a slug of IL fixed interest in my non-sheltered account.

SDN

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Re: More on Index Linked

#162750

Postby Hariseldon58 » August 29th, 2018, 12:36 am

It might be prudent to read carefully the technical details on the iShares site regarding hedging, it’s not as simple as it might appear.

https://www.ishares.com/uk/individual/en/literature/brochure/ishares-plc-currency-hedged-etfs-en-emea-brochure.pdf

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Re: More on Index Linked

#163147

Postby gbjbaanb » August 30th, 2018, 12:52 pm

richfool wrote:In the event of a major correction or bear market in equities, would index linkers and particularly TIPs provide any protection, - i.e. move in the opposite direction?


I used to think that was the case - and it certainly used to be 20 years ago. But these days, with QE and all that, I'm not so sure. I did look at a vanguard gilt tracker, and noticed that somewhat followed equities - though when equities drop, the gilt carries on flat for 6 months and then jumps up, but that's the time when equities jump up too!

https://www.charles-stanley-direct.co.u ... 00B467FS56

I think the periods where the tracker is flat is more like what you'd see in the case of a market drop, but I wouldn't be surprised to see even this drop too these days.

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Re: More on Index Linked

#234663

Postby richfool » July 7th, 2019, 7:01 pm

gbjbaanb wrote:
richfool wrote:In the event of a major correction or bear market in equities, would index linkers and particularly TIPs provide any protection, - i.e. move in the opposite direction?


I used to think that was the case - and it certainly used to be 20 years ago. But these days, with QE and all that, I'm not so sure. I did look at a vanguard gilt tracker, and noticed that somewhat followed equities - though when equities drop, the gilt carries on flat for 6 months and then jumps up, but that's the time when equities jump up too!

https://www.charles-stanley-direct.co.u ... 00B467FS56

I think the periods where the tracker is flat is more like what you'd see in the case of a market drop, but I wouldn't be surprised to see even this drop too these days.

Just reviewing this thread and a point springs to mind, - would there be any benefit or disadvantage in holding US TIPS (T15G or TIP05), - if the US enters a period of no growth, no or very low inflation and low interest rates?

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Re: More on Index Linked

#234840

Postby gbjbaanb » July 8th, 2019, 11:34 am

I'd imagine you can hold UK gilts just as well, if the US enters a period of recession, chances are it'll happen here too (to some extent at least)

I have held UK gilts during times of international turmoil (Italian banks threatening to collapse recently for example) and they did as expected, but the returns are slim even then.


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