The Lemon Fool

I have been musing on buying single bonds (rather than bond funds) as a means of preserving wealth in my SIPPs (with HL/AJ Bell). Presently, everything in the SIPPs are equites funds - Fundsmith, USB S&P 500 tracker, and a few other global funds. They seem to be doing OK at present, but of course they are wide open to any equity crash. For that reason, I'd like to start transferring some of the pot at least into single bonds.

Clicking around AJ Bell seems to indicate they have a selection of UK gilts. Not sure what to buy here, other than something steady away and that can preserve the wealth in case of an equities crash. Simplicity is the key here!

Some Qs then if I may - and forgive my ignorance.

I am assuming gilts will preserve the wealth if there is an equities crash. Is this correct- always proving HMG does not default I suppose!
Is it relatively painless to buy gilts on the AJBell website? Has anyone done this please? I'll call them anyways to enquire further....
I'd be looking at a 10 year or so maturity date. What are the basics in selecting a suitable gilt?
Does AJ Bell offer reasonable value for money over an IFA or other broker?
Assuming I go with AJ Bell. where is the interest paid into? Cash account?
At maturity where is the capital repaid?
I believe it may be a reasonably good time to buy gilts - what say you?

Oggy wrote:I have been musing on buying single bonds ...

Some Qs then if I may - and forgive my ignorance.

I am assuming gilts will preserve the wealth if there is an equities crash. Is this correct- always proving HMG does not default I suppose!

No. Gilts can crash also, and even if held to maturity the effect of inflation on your wealth isn't protected, and even if you bought index linked gilts, that wealth preservation only happens if you buy them at par (or better).

Oggy wrote:(1). I am assuming gilts will preserve the wealth if there is an equities crash. Is this correct- always proving HMG does not default I suppose!
(2). Is it relatively painless to buy gilts on the AJBell website? Has anyone done this please? I'll call them anyways to enquire further....
(3). I'd be looking at a 10 year or so maturity date. What are the basics in selecting a suitable gilt?
(4). Does AJ Bell offer reasonable value for money over an IFA or other broker?
(5). Assuming I go with AJ Bell. where is the interest paid into? Cash account?
(6). At maturity where is the capital repaid?
(7). I believe it may be a reasonably good time to buy gilts - what say you?

My numbering.
(1). More often than not.
(2). Yes.
(3). Maturity date. Low coupon if you do not want to pay much tax.
(4). Much cheaper than an IFA. Not as cheap as iWeb (except for a SIPP).
(5). Your account with AJB.
(6). Ditto.
(7). 10 year gilts returned about 4.5% a while ago, now they return about 3.5%. The may get cheaper or they may get more expensive. Nobody knows.

dealtn wrote:No. Gilts can crash also, and even if held to maturity the effect of inflation on your wealth isn't protected, and even if you bought index linked gilts, that wealth preservation only happens if you buy them at par (or better).

The relevant threshold is actually a zero real yield (or better) at purchase. Having a gilt priced (after issue) at par really is of no special significance because the coupon can vary from gilt to gilt. Your return will depend directly upon the coupon: the higher the coupon the higher a price you can pay (above par) and still "preserve" your wealth.

As GeoffF100 has noted, if purchasing in a taxable account then choosing lower coupon gilts will reduce the potential income tax bill. OTOH higher coupons give higher running income to either spend or reinvest.



GS

GoSeigen wrote:

dealtn wrote:No. Gilts can crash also, and even if held to maturity the effect of inflation on your wealth isn't protected, and even if you bought index linked gilts, that wealth preservation only happens if you buy them at par (or better).

The relevant threshold is actually a zero real yield (or better) at purchase. Having a gilt priced (after issue) at par really is of no special significance because the coupon can vary from gilt to gilt. Your return will depend directly upon the coupon: the higher the coupon the higher a price you can pay (above par) and still "preserve" your wealth.

As GeoffF100 has noted, if purchasing in a taxable account then choosing lower coupon gilts will reduce the potential income tax bill. OTOH higher coupons give higher running income to either spend or reinvest.



GS

All true, but I generalised for an obvious newbie who appears to have very simple assumptions. I thought correct those first before overcomplicating.

dealtn wrote:

GoSeigen wrote:
The relevant threshold is actually a zero real yield (or better) at purchase. Having a gilt priced (after issue) at par really is of no special significance because the coupon can vary from gilt to gilt. Your return will depend directly upon the coupon: the higher the coupon the higher a price you can pay (above par) and still "preserve" your wealth.

As GeoffF100 has noted, if purchasing in a taxable account then choosing lower coupon gilts will reduce the potential income tax bill. OTOH higher coupons give higher running income to either spend or reinvest.



GS

All true, but I generalised for an obvious newbie who appears to have very simple assumptions. I thought correct those first before overcomplicating.

Understood.

The OP was asking about wealth preservation in an equities crash, and dealtn was emphasising that the value of gilts can still decline in real or nominal terms during a crash. I think we'd both agree that it would be rare for them to underperform equities in that specific scenario. However arguably that is EXACTLY what has happened in 2022-23. Equities generally fell around 20% while long-dated gilts crashed some 50% or more! [TG61 was issued barely three years ago at par, yet traded below 30p for several months this year.]


GS

Gents

Thanks for all the replies. Excuse my ignorance, but how does one lose big time if you hold the gilt until maturity as I intend to? If bought under par, then the capital return is surely positive as is the coupon? I realize that if you sell them before maturity you may lose out....

Would you hold TG61 to maturity?

Question is how do you feel about locking in 3.52% annual return for the next 10 years?

If inflation does revert to the 2% target that's a real yield of 1.52% per annum or if the inflation target isn't realised, something less than that.

There's an opportunity cost involved but if you're happy with that nobody could say it's not the right decision for you.

GoSeigen wrote:As GeoffF100 has noted, if purchasing in a taxable account then choosing lower coupon gilts will reduce the potential income tax bill. OTOH higher coupons give higher running income to either spend or reinvest.

The higher coupon gilts often have a higher redemption yield, but that was not true when I last looked. Nonetheless, some people want a higher income, even if that is at the expense of a capital loss.

bluedonkey wrote:Would you hold TG61 to maturity?

I'd love to!

Oggy wrote:Gents

Thanks for all the replies. Excuse my ignorance, but how does one lose big time if you hold the gilt until maturity as I intend to? If bought under par, then the capital return is surely positive as is the coupon? I realize that if you sell them before maturity you may lose out....

As an example how do you feel about a 3% nominal return if inflation averaged 5% over that period? That's an approximate 20% loss of purchasing power assuming all income is reinvested and not spent. Much worse if you spend that income on the way with prices haven risen over 60%.

5 years ago if you were considering the same question with gilts trading above par, and YTMs much lower, you would be half way through that period of holding to maturity and already witnessed periods of inflation over 10% pa.

I don't make any claims about knowing the future, but ignoring inflation, or assuming wealth preservation is a nominal only exercise, has obvious real world problems.

Oggy wrote:Gents

Thanks for all the replies. Excuse my ignorance, but how does one lose big time if you hold the gilt until maturity as I intend to? If bought under par, then the capital return is surely positive as is the coupon? I realize that if you sell them before maturity you may lose out....

As I said in another thread, if you're holding to maturity then (assuming HMG doesn't default) you know exactly what the cash flows will be from the moment you buy the gilt, both the amount you'll get at maturity and the coupons you get along the way. You know it in nominal terms for conventional gilts and you know it in real (RPI) terms for index linked gilts.

The current ten year gilt, T34 (31-Jan-2034), has a yield to redemption of 3.61%. As others have said, inflation will very likely erode the real value of that. Note also that T34 is currently going for above par, 108.55, so the return will come from the coupon (4.625%) and there's be a capital loss at maturity when it redeems for 100. That may be ok for you or it may not, depending on what you want.

If income along the way isn't a goal then having the return come from the coupon does expose you to what's called reinvestment risk; the price of T34 will have changed over time and it may not be attractive to reinvest the coupons in it, and if not then comes the question of what you'll do with them.

OTOH, if you look at say, TG35 (31-Jul-2035) that currently has a yield to redemption of 3.71% and is going for below par, at 71.14, and with a coupon of only 0.625%, that means that most of the return will come from capital uplift and there's much smaller coupons along the way to worry about what to reinvest in. The inflation concern still applies of course.

Index linked gilts avoid the (RPI) inflation concerns, with the current ten year one, TRTQ 0.750% 22-Mar-2034, having a real yield to redemption of 0.23%, but it is going for above par, at 105.16. Alternatively there's TG36 0.125% 22-Nov-2036 with a real yield to redemption of 0.39%, which is going for below par, at 96.6.

Note that none of those are a recommendation, per se, just ones that are at or close to your 10 year preference to help you understand the different flavours you could go for for that period. Other gilts are available. All numbers from http://www.yieldgimp.com

As I said in another thread, if you're holding to maturity then (assuming HMG doesn't default) you know exactly what the cash flows will be from the moment you buy the gilt, both the amount you'll get at maturity and the coupons you get along the way. You know it in nominal terms for conventional gilts and you know it in real (RPI) terms for index linked gilts.

The current ten year gilt, T34 (31-Jan-2034), has a yield to redemption of 3.61%. As others have said, inflation will very likely erode the real value of that. Note also that T34 is currently going for above par, 108.55, so the return will come from the coupon (4.625%) and there's be a capital loss at maturity when it redeems for 100. That may be ok for you or it may not, depending on what you want.

If income along the way isn't a goal then having the return come from the coupon does expose you to what's called reinvestment risk; the price of T34 will have changed over time and it may not be attractive to reinvest the coupons in it, and if not then comes the question of what you'll do with them.

OTOH, if you look at say, TG35 (31-Jul-2035) that currently has a yield to redemption of 3.71% and is going for below par, at 71.14, and with a coupon of only 0.625%, that means that most of the return will come from capital uplift and there's much smaller coupons along the way to worry about what to reinvest in. The inflation concern still applies of course.

Index linked gilts avoid the (RPI) inflation concerns, with the current ten year one, TRTQ 0.750% 22-Mar-2034, having a real yield to redemption of 0.23%, but it is going for above par, at 105.16. Alternatively there's TG36 0.125% 22-Nov-2036 with a real yield to redemption of 0.39%, which is going for below par, at 96.6.

Note that none of those are a recommendation, per se, just ones that are at or close to your 10 year preference to help you understand the different flavours you could go for for that period. Other gilts are available. All numbers from http://www.yieldgimp.com

This is excellent - many thanks and for the link. Thanks also to dealtn for the advice on the inflation aspects. I am reading up on these things but I am nowhere near proficient enough at present to plump for a single bond. However this advice is a very welcome starter for 10.

It's all deeply uncertain (to me anyways) and I am still torn between single bonds, ETF bond funds like VAGS, or even an annuity using (say) 50% of the pot to try and offset the present risk of holding 100% in equity funds, which worries me somewhat.

Oggy wrote:...I am still torn between single bonds, ETF bond funds like VAGS, or even an annuity using (say) 50% of the pot to try and offset the present risk of holding 100% in equity funds, which worries me somewhat.

I have a goodly sum in Preference shares, around 25% of our liquid, current yields ~6.75%.
Another 25% or so in is Fixed Interest ITs, notably NCYF, BIPS, SMIF and TFIF, and a rump of SHRS which I will be selling.
The IT's are high yielding, and although SPs are at or near a 12-month high, I believe there is more to come.

Where Fixed Interest will be in the rate cycle ten years hence is anyone's guess of course. One will have to trade out and perhaps back in, if one wishes to maximise capital. As an income investor I might just sit there and watch it all rise and fall.

V8

I have a goodly sum in Preference shares, around 25% of our liquid, current yields ~6.75%.
Another 25% or so in is Fixed Interest ITs, notably NCYF, BIPS, SMIF and TFIF, and a rump of SHRS which I will be selling.
The IT's are high yielding, and although SPs are at or near a 12-month high, I believe there is more to come.

Where Fixed Interest will be in the rate cycle ten years hence is anyone's guess of course. One will have to trade out and perhaps back in, if one wishes to maximise capital. As an income investor I might just sit there and watch it all rise and fall.

Fine, but my knowledge of such matters is limited to say the least at present! My concern is therefore not having the ability to make an informed choice. I don't want to guess - not with my money anyways.....

dealtn wrote:I don't make any claims about knowing the future, but ignoring inflation, or assuming wealth preservation is a nominal only exercise, has obvious real world problems.

Nobody is recommending gilts to preserve wealth by themselves. (Except perhaps index linked gilts with a positive real redemption yield.) The usual recommendation is a combination of equities and gilts (or other bonds). If the equities crash, there is likely to be a flight to safety, and gilts will soften the blow. That is particularly important for investors who are likely to panic and sell up. If there is deflation, gilts will usually do well. Inflation is toxic for equities and gilts, but the equities will usually outgrow inflation eventually.

88V8 wrote:Another 25% or so in is Fixed Interest ITs, notably NCYF, BIPS, SMIF and TFIF, and a rump of SHRS which I will be selling.
The IT's are high yielding, and although SPs are at or near a 12-month high, I believe there is more to come.

V8

88V8, may I ask why and when you plan to sell SHRS?

richfool wrote:

88V8 wrote:...a rump of SHRS which I will be selling.

88V8, may I ask why and when you plan to sell SHRS?

I already sold most and expect to sell the rest - in OH's account - this week.
Reason... the merger with the mediocre ASCI Aberdeen Smaller Cos, which I consider of no value whatsoever to Shires holders.

Haven't decided yet where to reinvest the proceeds given that all the FI ITs and Prefs that have been such an obvious target in recent months have now moved up. Still investible, just not such a slamdunk.

V8

The most straight forward method of wealth preservation is savings in bank/building society, which now offer fixed rate returns of 5%. Interest rates are due to fall so this might be good time to lock on a good rate. Next is a general 'wealth preservation fund' like Personal Assets Trust which has its assets spread in bonds, gold etc. Picking single investments classes like bonds, gold, silver or bitcoin. Is great when they're going up. But like in 2022 can also drop in value with equities.