Low risk options for sizeable cash balance in ISA

[AleisterCrowley]

I'm not buying (many) shares at the moment , and have transferred money into my ISA to use up the 2016/2017 allowance.
This has left my ISA at c 25% in cash, which is sitting there doing nothing*
Any suggestions as to what to invest in to give some return with very low risk ? I'd happily 'lock in' at least half the cash for 1 year, as i don't think I'll be buying much before the next financial year (6 weeks away)
I know I've asked a similar question before , but would appreciate any thoughts as I'm still thinking...


thanks (again)
AC




* I did look at opening/paying into a Cash ISA this year but I've got a Help To Buy ISA running, and based on responses to an earlier query on the lemon Fool it looks like I can't pay into another cash ISA. Unfortunately the HTB one is restricted to £2,400 pa so I'm forced to pay the £13k balance into my equities ISA.

[toofast2live]

AC

I can't look at the moment but surely there are a few bonds with very short durations which could be bought?

[staffordian]

What about putting some into LLPC or LLPD?

http://www.londonstockexchange.com/exch ... XSSX3.html

http://www.londonstockexchange.com/exch ... ml?lang=en

Lloyds seem reasonable secure and on the up, and they pay quarterly IIRC.

I supose the main risk might be a price drop if interest rates rise, as this would make them less attractive.

[AleisterCrowley]

I'm after something where the only risk to capital is a default, assuming I can hold for min 1 yr.
I assume (please correct me) that corporate bond funds like SLXX could potentially show a capital loss regardless of holding time - if for example interest rates go up.
I have been looking at bonds from the likes of Unilever, given that they're unlikely to go bust within a year, but there's only a very short one available (4 months)
HSDL seem to offer a lot of corporate bonds on their platform, so hopefully they qualify for cheap dealing days. Otherwise the £12.50 charge makes a dent in returns. They only sell Gilts over the phone, which is £25 minimum charge
Perhaps I need to stretch my window to 2 years.

[hiriskpaul]

I am regularly on the lookout for short dated for parking cash inside tax shelters. Best I know of at present is Provident Financial 7% 2017. You can currently buy for around 103.1 plus 2.685 accrued interest. Payoff is 3.5% in April, 3.5% in October and final redemption at 100%. Total return works out at 0.976% (about 1.5% IRR) less dealing charges, or about £9.76 per £1000 investment. So not really worthwhile unless you have a few £k to invest. Reassuring PF prelims out today, so should be safe, but never say never!

If anyone finds anything similar I would also like to now about it.

[AleisterCrowley]

I looked at the Provident Financial jobbie, but putting enough in there to swamp the dealing costs (say £5k) looked 'risky' compared with the likes of Unilever - solely based on gut feel rather than analysis - not sure what the ratings are, and ULVR bond is too short

[hiriskpaul]

I looked at the Provident Financial jobbie, but putting enough in there to swamp the dealing costs (say £5k) looked 'risky' compared with the likes of Unilever - solely based on gut feel rather than analysis - not sure what the ratings are, and ULVR bond is too short

I very much doubt you will be able to get Unilever 4.75% 2017 for a clean price much below 102. There is 259 days of accrued to pay as well (about £33.71 per £1,000), so all in 105.371, but the redemption value is only 104.75...

[AleisterCrowley]

There is 259 days of accrued to pay as well
How does that work then? I thought if i wanted to buy Unilever 4.75 i'd pay 101.231 and get an equivalent yield of 0.528% if held to maturity
i.e. Pay £1012.30 for each £1000 block and get back £1023.75 on 16 June 2017(being par value + final coupon payment)
http://www.fixedincomeinvestor.co.uk/x/ ... ?groupid=4

(That does seem to work out higher than the quoted 0.528% though...)

[hiriskpaul]

There is 259 days of accrued to pay as well
How does that work then? I thought if i wanted to buy Unilever 4.75 i'd pay 101.231 and get an equivalent yield of 0.528% if held to maturity
i.e. Pay £1012.30 for each £1000 block and get back £1023.75 on 16 June 2017(being par value + final coupon payment)
http://www.fixedincomeinvestor.co.uk/x/ ... ?groupid=4

(That does seem to work out higher than the quoted 0.528% though...)

These pay annually, so final coupon is 4.75%. The price they quote is the mid price. Bog standard yield calculations are often inaccurate with short maturities, unless they are meticulous about the price and accrued interest calculation - essentially you are looking for the difference between 2 large numbers and small errors can have a significant impact on the yield. If you take their price of 101.231, add the 259 days of accrued 3.371, gives 104.602. Payback is 104.75, so return is 104.75/104.602 - 1 = 0.1415%. Annualising that with about 3.5 months to maturity is about (1.001415)^(12/3.5) - 1 = 0.49%. Not too far from the quoted 0.528%.

The flaw is that you are unlikely to be able to buy for 101.231!

[Lootman]

Or there is ERNS - the iShares Ultrashort ETF.

It's cash-equivalent, has a minute risk and yields about 0.8%.

[AleisterCrowley]

Ah, thanks both - have to get my spreadsheet up and running and do some sums

That iShares ERNS sounds interesting - must investigate (hopefully will pay me more than ERNIE has recently.....)

[masmon]

What about ishares is15 0-5 year corporate bond ETF, I believe its yield is around 2.5%

[colin]

Zero Dividend Preference shares are a 'synthetic fixed interest' option. Look at the holdings of Capital Gearing trust and cross reference to the AIC site, those with 5years to go seem to yield about 5% pa but they don't pay anything until redemption, though shares can be sold any time and the price should rise as the redemption year approaches. DYOR diligently as their value is dependent on the underlying portfolio of shares achieving a defined hurdle rate.
£???

[AleisterCrowley]

ZDPs are a new one for me - possibly too risky/volatile if I need to use the money in , say, one year?

iShares ERNS is looking the most hopeful at the moment - what would be the effect of a interest rate rise though ? - vague memories that this is calculated from the duration on the bonds

[Alaric]

ZDPs are a new one for me - possibly too risky/volatile if I need to use the money in , say, one year?

I'm not even sure if they are available for retail investors, but there are also Gilt Strips. What these offer is a guaranteed payment at some future date. The name comes from their creation from "stripped" securities where each future payment is sold separately.

You don't have the default risk of ZDPs, and probably there's a market, so spreads are not high. The risk is of interest rate changes, so if you needed to sell before maturity, you might get a negative return if interest rates had risen.

[AleisterCrowley]

I need to limit it to stuff I can buy in an HSDL ISA - preferably nice and simple.....!

[BusyBumbleBee]

I have put some thoughts on this in a Safe Haven Portfolio over on viewtopic.php?f=8&t=3816

[AleisterCrowley]

I will have a look, thanks

[TimR]

iShares ERNS is looking the most hopeful at the moment - what would be the effect of a interest rate rise though ? - vague memories that this is calculated from the duration on the bonds

I understand the Ongoing Charges Figure (OCF) for ERNS (Ultrashort) has been reduced to 0.09% whereas the OCF for IS15 ( 0-5yr) 0.20%

Does anyone know the expected return for these ETFs net of charges when compared to a Cash ISA ?

I suppose the biggest risks to these ETFs is inflation and the fluctuation in the value of the pound which will affect all Sterling investments ?

TimR

[AleisterCrowley]

What would happen if there were an unexpected rise in interest rates over the next year or so ? Would there be permanent loss of capital? Does ERNS hold all bonds to maturity?