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Index Linked Gilt fund and glidepath

Gilts, bonds, and interest-bearing shares
1nvest
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Index Linked Gilt fund and glidepath

#409824

Postby 1nvest » May 6th, 2021, 3:23 pm

The likes of INXG and GILI index linked gilt funds have average maturity/duration of around 22 years. Easier to buy than a manual ladder of Index Linked Gilts, but what if that is too long for requirements? Say that I want just 10 years of cover where otherwise I might load into 1 through 10 year ILG's to fill that. Yes it might cost £112K of present day money to buy £100K of future inflation adjusted income/drawdown (10 years of 10K/year of inflation adjusted 'income' (drawdown)), but with that aside as a uncomfortable but acceptable cost my thinking is perhaps averaging using funds.

Perhaps 25% allocation to INXG with a view to draw that down to 0% remaining over 10 years, but where given the mismatch in average maturity perhaps 50/50 that with cash (1 year fixed term cash deposits). So 12.5% initial allocation to each. Spending (drawdown) that initial 25% over 10 years. Rest in 'growth', perhaps a three way equal split of FT250, US stock and gold, in anticipation/hope that the growth from that initial 75% might offset the drawdown of 'bonds'. Starts with 75/25 growth/bond, ends 10 years later with 100% all in growth (bonds all spent), averaging 87.5/12.5 growth bonds over the ten years. If a 3% annualised real in the growth allocation is achieved then that ends the ten years with a similar inflation adjusted amount as at the start date.

A factor however is that in looking at 10 year maturity in the first instance, but where that declines down progressively through 5 to 0 years, is suggestive that ILG's (INXG) should be spent first, leave the 1 year cash deposits as-is, for the first 5 years, before then spending the cash deposits once all of INXG holdings have been spent.

What are others doing? Do you prefer direct holdings of a Index Linked Gilt ladder tuned specifically to your objectives? Or do you use a proxy for that such as above?

I rounded the figures above, my actual circumstances are that's its a £9.4K/year inflation adjusted amount, and just 6.5 years. i.e. a surrogate for a £9.4K state pension amount (presently/recently retired aged 60 with a inflation linked occupational pension already being paid and a state pension age of 66 years 4 months). Also its more a case of being academic rather than being critical as at age 67 my occupational + state pensions combined are 'enough' and actual surplus capital/investments above and beyond that is massively more than enough, i.e. I could just 'write off' and dump the £60K state pension substitute into a cash deposit without even blinking.

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Re: Index Linked Gilt fund and glidepath

#409845

Postby Barnhouse » May 6th, 2021, 4:37 pm

If going down the linker route One could lump it into one issue of approximately the right duration and sell a slug as income is needed. Avoids AMC, May benefit from rolling down the yield curve and locks in the cost of the desired income stream. At about -2.6% yield currently that is too expensive for my taste.

As we are looking at liability matching here I prefer deposits (1-5 year and rate tarting instant cash), some lower risk peer2peer and a little in gbp hedged treasuries (eg trxs) achieving about 3.5% current nominal yield overall. That still provides a positive real return if inflation rises by 2-3%. If inflation rises more than that then I would hope to see a rise in short rates and that this mix provides the flexibility to be adapted.

A bit more work but the smaller individual investors edge over the big boys is in managing cash.

INXG et al. could still have a place in my portfolio but not for shorter term spending needs.

JohnW
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Re: Index Linked Gilt fund and glidepath

#409968

Postby JohnW » May 7th, 2021, 12:18 am

It's an interesting strategy to mull over, and with merit. Just a couple of observations:
Using the liability matching linker fund/cash mix for the next 10 years, leaves you 100% growth assets at the end of the 10 years; might need some risk reduction to avoid that, for some folk.
But more you your point, this has been described 5 years ago, and I think the 'trick' was to match the duration of your 'reliable cash needs' (next 10 years for you) with a 'duration' of a link fund/cash mix. So, your duration is about 5 years at the start. If the fund duration is 20 years, then you need to commence your 10 years by mixing the fund and cash as 25/75 (assuming the cash duration is zero, and 25% is 5 divided by 20). But you did 50/50 I think.
Each year you recalculate your remaining duration, and liquidate fund as required to have your fund/cash in the appropriate mix. https://www.financialwisdomforum.org/fo ... 3&start=50

AshleyW
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Re: Index Linked Gilt fund and glidepath

#410175

Postby AshleyW » May 7th, 2021, 11:09 pm

Is it really viable and cost-effective to build an index-linked ladder?

It would be great if index-linked gilts were just like national Savings Certificates - you pay £1000 for a 5,6,7, year bond and the capital and interest is index-linked - but of course, the problem with the index linkers is that they are initially auctioned and then freely traded. I guess they are never sold at par. This makes life complicated. For instance, the 11/4% 2022 IL trades at around £155.80. It was issued in October 2008 and its current indexed linked value is about £136. So you have to pay a 14% premium. In rough figures, a £1000 investment over 10 years at 3% inflation should have a final value of £1344. The investment of £1000 in the index linker will give you £1156.

Index linkers are a bit of a gamble. If inflation turns out significantly higher than the market expects then you will do far better than investing in conventional gilts. if inflation turns out to be lower you would have been better off investing in conventionals with the same duration.

I´ve been looking at how to construct something similar to a 20-year deferred annuity (which don´t seem to be sold in the UK) - basically a 20-year investment culminating with the purchase of a traditional annuity. I had considered index linkers but can´t justify the price - so it looks as though it will be a low volatile portfolio such as Harry Browne´s Permanent Portfolio or Tyler´s Golden Butterfly so I can have some growth but a low risk of it crashing in the last few years.

GeoffF100
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Re: Index Linked Gilt fund and glidepath

#410209

Postby GeoffF100 » May 8th, 2021, 9:37 am

Direct holding of 1/8% new style linkers are more tax efficient than in index linked gilt funds. They also do not have management charges. They have to be dealt over the phone, and market makers do not want to be bothered with small orders that make them no money. You need to trade them in big blocks to get a reasonable price. The prices for trading £50K blocks have not been too bad, in my experience, but bigger seems to be better.

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Re: Index Linked Gilt fund and glidepath

#410259

Postby Wuffle » May 8th, 2021, 1:09 pm

An observation.

I know that the intellectual challenge is appealing to many on here and that is OK. Me too.
I would look long and hard at Capital Gearing Trust (containing a chunk of linkers) with a view to selling off per year.

All objections to charges for me are nullified by hanging around at work for another fortnight.
I have tried to manage near retirees and it just ended in a stand off as they wound down long before the end.
It was basically free money.

W.

1nvest
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Re: Index Linked Gilt fund and glidepath

#410260

Postby 1nvest » May 8th, 2021, 1:11 pm

AshleyW wrote:a low volatile portfolio such as Harry Browne´s Permanent Portfolio or Tyler´s Golden Butterfly so I can have some growth but a low risk of it crashing in the last few years.

Low volatility in nominal terms, mediocre volatility in real (after inflation) terms. The GB is just a 20/80 stock/PP. The PP is a 50/50 blend of 50/50 short (1 year)/long (20 year) dated gilt barbell that approximates to a central 10 year bullet; And a 50/50 stock/gold barbell that approximates to a central global bond bullet. Benefited from the rising tide of high to low interest rate transition, untested in the opposite direction, likely would see a drag where it previously had the benefit of holding longer dated bonds paying high yields. In a rising interest rates era you more ideally want to be holding shorter dated that roll into higher yields sooner rather than later.

GeoffF100 wrote:Direct holding of 1/8% new style linkers are more tax efficient than in index linked gilt funds. They also do not have management charges. They have to be dealt over the phone, and market makers do not want to be bothered with small orders that make them no money. You need to trade them in big blocks to get a reasonable price. The prices for trading £50K blocks have not been too bad, in my experience, but bigger seems to be better.

I personally favour a Talmud/Old-Money (generational wealth) type asset allocation, a third a third a third mantra, land/commerce/reserves (Talmud), land/art/gold (Old Money) - but where I'd rather hold stocks than art. For me that's £/$/global currency (gold) diversification holding UK home, US stock, gold asset diversification. Like Gilts the spreads on gold can be wide, 5% or even 10%. To address that I use a 'other peoples money' mindset. Hold tighter spread gold fund such as SGLN as the gold allocation, but as/when good portfolio gains occur, perhaps 10% real one year, discount that by perhaps 2% and count it as a +8% year and use the surplus to cover the spread cost of swapping out paper gold for physical gold. And once purchased look to keep that as core physical holdings that are never sold and instead use adjustment long or short paper-gold positions to align to overall desired level of exposure. Yes I know I'm still paying that spread but just feels more comfortable to mentally account it that way. Whilst holding some I'm not a fan of paper gold (funds), as I opine that even if a fund claims to be backed by physical gold I'm concerned that behind that there are risks such as them perhaps lending gold - and that maybe when push comes to shove and debtors default so also might the fund.

A nice feature with the Talmud/Old-Money style is that the risk and rewards are such that it might be considered as either being the 'safe' bucket asset allocation or the 'growth' bucket asset allocation, and when both buckets hold the same assets the two can be merged into one. Yet another factor is that in including home value as part of a portfolio then the large capital base can use a lower SWR % to provide the same £££ of income, and lowering SWR even a little can make a big difference to overall outcome. For rebalancing purposes holding some stock as a proxy for 'land' value, more so if REIT type stock, is acceptable IMO.

AshleyW
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Re: Index Linked Gilt fund and glidepath

#410351

Postby AshleyW » May 8th, 2021, 7:52 pm

1nvest wrote
Low volatility in nominal terms, mediocre volatility in real (after inflation) terms. The GB is just a 20/80 stock/PP. The PP is a 50/50 blend of 50/50 short (1 year)/long (20 year


I´m not sure what you mean by mediocre real volatility- Typically the Permanent Portfolio has a maximum drawdown of around 5% compared to 30%+ for a 60/40 portfolio - so I would class this as low volatility compared to other portfolios. Yes the Golden Butterfly is a Permanent Portfolio derivative but with 40% equity split between total market and small-cap value. It has higher growth than the PP but with higher volatility.

Certainly, if we had 100% foresight and knew for certain that bond yields will increase over the next few years then it would be foolish to hold long-duration gilts or treasuries. Ten years ago when base rates were near zero who would have thought that for over 10 years they would remain at historic lows. Common sense would have said you should have got out of long gilts but in March 2020 you would have been rueing the decision as they really would have protected your portfolio the stock market fall. We just cannot predict the future - OK, except for death and taxes.

The idea of portfolios such as the Permanent Portfolio is that they contain at least one asset class that will prosper whatever the economic situation - but of course, at least one other will be suffering. This means it takes courage to invest in such a portfolio because you'll be fearful for the prospects of at least one asset class. 25% of your portfolio on cash earning nothing??? 25% in long-term bonds with bond yields rising??? But it has been shown to work - at least since 1971 and should perform better than a 60/40 portfolio.

However, we only have data since 1971 and this is a short period compared to the 100+ years of stock and bond data and whilst gold has behaved pretty much as expected during recent market crashes we only have real gold price data post-1971 so we must treat all portfolios containing gold with a healthy degree of scepticism but we can have some confidence in its role as do have the knowledge that gold has for 2000+ years been seen as a store of value and protection against inflation - which is the reason it is in both the Permanent and Golden Butterfly portfolios.


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