The Lemon Fool

I meant to add this.
Todays yield based on last two distributions is 2.26% Dollar LIBOR is about 2.8% today , before March it was less than 2%. FLOS is a mixture of investment grade corporates which i assume will pay a small spread above Libor on their borrowing and US Treasuries which I again assume do not have to trade at a discount. Of course interest rates might fall and payouts decrease or the market might start to price in rate falls thus provoking capital falls but it shouldn't be by much.

colin wrote:I meant to add this.
Todays yield based on last two distributions is 2.26% Dollar LIBOR is about 2.8% today , before March it was less than 2%. FLOS is a mixture of investment grade corporates which i assume will pay a small spread above Libor on their borrowing and US Treasuries which I again assume do not have to trade at a discount. Of course interest rates might fall and payouts decrease or the market might start to price in rate falls thus provoking capital falls but it shouldn't be by much.

But, from GBP point of view, the returns seem to be less than 0.5%. And with the GBPUSD interest rate spread increasing, I believe the cost of hedging will also increase. Generally a long term hedge(may be short term in this case) is based on interest rate differential

How did you arrive at that conclussion?

colin wrote:How did you arrive at that conclussion?

The hedging will be done using FX forwards, or possibly other FX derivatives. These are priced off the current spot FX rate and the GBP and USD yield curves. Because the USD curve is higher than the GBP curve, the forward GBP/USD rate is higher than spot. I.e you will get a worst rate to convert a future USD cash flow to sterling than you would if you wanted to convert today.

Another way to think about it is that the NPV of a future USD amount is lower than it would be if the cash flow was in GBP because the USD discount rate is higher than the GBP discount rate.

Essentially the fully hedged return of a US Treasury will be very close to that of the equivalent duration gilt, even though the yield to maturity of the UST will be higher than that of an equivalent gilt.

I too have a lot of cash in my ISAs from the sale of Aviva prefs I did a few weeks ago. These I switched into from UK bank prefs during the Aviva pref debacle. Holding a lot of cash in an ISA is undesirable as the FSCS limit on cash at brokers is £50k. Above that you are just another uninsured and unsecured creditor. You also don't get paid any interest of course.

A few years ago you could get a reasonable return from short dated bank senior unsecured, but it hardly seems worthwhile now after paying charges and the spread. I will reinvest the cash somewhere in the new year, so am leaving it at present, otherwise I would go for ERNS. I still might, but need time to review.

Thanks for that detailed explanation, though i must admit it goes way over my head!
Perhaps my simple understanding has been too simplistic, i just looked at the difference in charges between the hedged and the unhedged versions of this fund. Unhedged the dollar denominated version has a TER of .1% whereas the GBP hedged version costs .12% so i just assumed that the cost of hedging is .02% but it seems I must be wrong. according to ishares website the return for the unhedged version over their last accounting period was 2.27%. That figure is the return in US dollars so currency fluctuations are not accounted for, the return for the GBP version is not accurate because the fund has not existed long enough to make two full distributions within the accounting period.
As it is a floating rate fund then surely it is important to take into account changes in the dollar LIBOR rate which mean that future distributions must be higher than past distributions?

colin wrote:Thanks for that detailed explanation, though i must admit it goes way over my head!
Perhaps my simple understanding has been too simplistic, i just looked at the difference in charges between the hedged and the unhedged versions of this fund. Unhedged the dollar denominated version has a TER of .1% whereas the GBP hedged version costs .12% so i just assumed that the cost of hedging is .02% but it seems I must be wrong. according to ishares website the return for the unhedged version over their last accounting period was 2.27%. That figure is the return in US dollars so currency fluctuations are not accounted for, the return for the GBP version is not accurate because the fund has not existed long enough to make two full distributions within the accounting period.
As it is a floating rate fund then surely it is important to take into account changes in the dollar LIBOR rate which mean that future distributions must be higher than past distributions?

Yes they will be, but as the US LIBOR rates rise, so do GBP/USD forward rates, so if fully hedged, a GBP investor will not see the benefit.

The TER may or may not include some of the cost of the FX trading, which will be tiny for GBP/USD contracts, but will not include the interest rate differential on the forwards.

hiriskpaul wrote:Holding a lot of cash in an ISA is undesirable as the FSCS limit on cash at brokers is £50k.

No, that's for investments. When it comes to cash, client money has to be spread amongst at least five authorised deposit takers and your share in each of those is covered up to £85K and with the normal "total deposits in bank" rule.

So, you could have, say, £425K (5*£85K) cash in your broker and if they spread it equally amongst banks A, B, C, D & E and you had no other deposits at those banks then you'd be covered in full. If, OTOH, you already had £85K in each of those banks then your broker cash wouldn't be covered at all.

The problem is that brokers don't seem to be willing to tell you which banks they put client money into, so you can't tally those with your savings accounts and figure out how much of your broker cash is covered. See my exchange with IWeb on exactly this matter, viewtopic.php?f=26&t=13044&p=157506 (read all my posts to get the full exchange).

mc2fool wrote:

hiriskpaul wrote:Holding a lot of cash in an ISA is undesirable as the FSCS limit on cash at brokers is £50k.

No, that's for investments. When it comes to cash, client money has to be spread amongst at least five authorised deposit takers and your share in each of those is covered up to £85K and with the normal "total deposits in bank" rule.

So, you could have, say, £425K (5*£85K) cash in your broker and if they spread it equally amongst banks A, B, C, D & E and you had no other deposits at those banks then you'd be covered in full. If, OTOH, you already had £85K in each of those banks then your broker cash wouldn't be covered at all.

The problem is that brokers don't seem to be willing to tell you which banks they put client money into, so you can't tally those with your savings accounts and figure out how much of your broker cash is covered. See my exchange with IWeb on exactly this matter, viewtopic.php?f=26&t=13044&p=157506 (read all my posts to get the full exchange).

Very interesting thanks. Did not realise the protection worked like that.

Of course, the solution is... NS and I; Income Bonds.

1.16% government guaranteed. Hold up to £1,000,000

mc2fool wrote:

hiriskpaul wrote:Holding a lot of cash in an ISA is undesirable as the FSCS limit on cash at brokers is £50k.

No, that's for investments. When it comes to cash, client money has to be spread amongst at least five authorised deposit takers and your share in each of those is covered up to £85K and with the normal "total deposits in bank" rule.

So, you could have, say, £425K (5*£85K) cash in your broker and if they spread it equally amongst banks A, B, C, D & E and you had no other deposits at those banks then you'd be covered in full. If, OTOH, you already had £85K in each of those banks then your broker cash wouldn't be covered at all.

The problem is that brokers don't seem to be willing to tell you which banks they put client money into, so you can't tally those with your savings accounts and figure out how much of your broker cash is covered. See my exchange with IWeb on exactly this matter, viewtopic.php?f=26&t=13044&p=157506 (read all my posts to get the full exchange).

Yes, the FSCS guarantee of holdings is 50K. They are supposedly 'ringfenced' and safe, though I have never seen any documentation to prove this, despite it being discussed on TMF and now TLF for about 20 years.

I suppose one could ask, if they are ringfenced and safe, why the guarantee is only 50k.

Many people open accounts with different brokers to get around this problem, but you have to be careful that one broker isn't taken over by another and your guarantees are suddenly halved.

Steve

runnygum wrote:Of course, the solution is... NS and I; Income Bonds.

1.16% government guaranteed. Hold up to £1,000,000

You can't hold in an ISA as far as I know, which is what the OP requires.

What about FLOT, tracks floating rate bonds?

Hello All,

viewtopic.php?f=17&t=16734

Above is a link in continuation of the same discussion. I posted it in case anyone may be interested. I am planning to move money to have fixeddeposits within SIPP using provider like MinervaSIPP; still in the process of making decisions.

Cheers,
ap