If ever a graph tells a story it is the one below, which shows the yields since 1990 on 10-year UK gilts, and it is easy to see the trend.
In 1990, 10-year gilt yields, which move inversely to gilt prices, hit more than 13%. Today, yields are hovering around 1%, after trending downwards relatively steadily.
Frank Talbot, head of investment research at Citywire, said: ‘We have had a 30-year-plus golden age for fixed income investments. However, unlike equity markets, the upside for UK gilts is not potentially infinite and yields look unlikely to fall further.’
Moreover, Talbot said if we start to see meaningful UK economic growth, interest rates may have to rise to curb inflation, reducing gilt prices in the process. In this low-yield world, with gilt prices possibly under pressure, investors would be forgiven for wondering if there is any point holding UK gilts at all.
John Fachiri, director of Wirral-based advice firm John Fachiri, said: ‘Up to about three years ago all the commentators said you could get rid of gilts and they had had their day. But these bonds kept giving good capital growth, so how wrong can you be?’
In other words, do not rule out further capital gains. In addition, advisers think gilts have a role in portfolio construction.
Dennis Hall, chief executive of London-based Yellowtail Financial Planning, said: ‘We have not altered our asset allocation risk since 2008, because we don’t want to second guess the market. We use FinaMetrica [risk profiling system] to show how much money should be in defensive or growth assets.’
Hall said he takes a 30 to 40-year viewpoint, not a 10-year viewpoint. He also avoids making tactical asset allocation decisions ‘as you can’t consistently beat indices or markets’. As such, Hall retains exposure to UK gilts.
‘If world markets collapsed and there was a flight to safety, you would expect their prices to rise,’ he said, presumably despite the prospect of negative yields.
Matthew Pescott Frost, director of Suffolk-based Matthew Douglas, sees gilts as vital. ‘They are an essential part of client portfolios,’ he said. ‘We buy them through collectives and use them as a kind of portfolio insurance.’
He currently retains exposure through the Standard Life Mixed Bond fund and the Vanguard Global Bond Index Hedged fund.
Gilts retain a role beyond that of diversifier. Hall said there were clients who sought them for safety and security. Some of these clients, who have large balances, would rather trust the UK government than ‘a series of banks where they might exceed investor compensation limits’.
Hall often steers clients seeking relatively low-risk income towards cash management vehicles. ‘Income investors won’t get much income from gilts,’ he said. ‘With a cash management service, people have a hub account with someone opening and closing accounts on their behalf, shopping around for good bank and building society interest rates.’
Fachiri sometimes holds gilt funds for clients wanting some low-risk diversification. But he sees relative attractions in investment grade corporate bonds, ‘as they give a higher return’.
Clients with long investment horizons may not need to be invested in gilts at all, as they have the time to ride out investment volatility. A multi-asset fund manager I spoke to last week said gilts can play an essential role, even for these investors.
He said investors do not just invest and then ignore their portfolios for 20 years when they come to cash them in. The manager said they monitor their portfolio, and too much volatility worries them.
He stressed the importance of understanding investor behaviour and investors’ need for smooth returns. He said gilts had a crucial role, but there were opportunities in government bonds outside the UK, as long as currency risk is hedged out.