By ROBERT HARLEY 02/02/2007
Gilt funds are the ‘D’ list celebrities of the fund management world. They’re seldom in the limelight and few people really care about their existence. However, investors in these funds are being short-changed. All but four of the 22 retail funds in the IMA UK Gilt Sector (i.e. unit trusts/oeics) have failed to beat the FTSE ABG All Stocks Index (a comparable gilt index) over the last three years (to 31/1/07). Of the four that have, three have a rigid ‘long gilt’ remit (which has worked in their favour versus the Index over that period) and the other is a tracker. These funds represent nearly £2.4 billion of investors’ money so, assuming a typical annual charge of 0.75%, fund managers are collectively pocketing around £18 million a year for underperforming.
| "...fund managers are collectively pocketing around £18 million a year for underperforming." |
This misery extends to gilt pension funds too. Just six of 42 funds in the ABI Pension Fund UK Gilt sector beat the Index over the same period, meaning over £3.6 billion of investors’ cash is failing. Index-Linked Gilt funds fare little better, with similar stories to above in both the unit trust and pension fund sectors. Some of the largest unit trust offenders are listed below:
| Fund |
3 year return |
Fund Size (£m)
|
| FTSE ABG All Stocks Index |
14.5% |
n/a |
| Scottish Widows Gilt |
12.4% |
248 |
| Schroder Gilt & Fixed Interest |
12.4% |
298 |
| Henderson UK Gilt |
12.1% |
327 |
| M&G Gilt & Fixed Interest Income |
12.1% |
372 |
| Threadneedle Sterling Bond |
11.3% |
399 |
| All figures bid to bid with gross income reinvested to 31/1/07. Source: Lipper. |
It seems clear that active managers struggle to add value in the gilt market, especially after they’ve taken their fees. And even trackers don’t seem to work very efficiently. There are fewer than 50 conventional gilts in the market to choose from and aside from making a decision on whether to go long or short on duration, which affects how sensitive the fund is to interest rate and inflation changes, there’s very little else for them to do.
If you really want gilt exposure then buying directly or via a tracker seems to make more sense. Alternatively, if you’re looking for general fixed interest exposure in your portfolio then using a good actively managed fund, where the manager can vary exposure to different types of fixed interest securities in a bid to optimise returns, is sensible. The fixed interest market is especially tough at present, so the greater a manager’s flexibility and skill, the better the prospects for outperformance.
| "The Government this week confirmed that the new ISA rules will be introduced in April 2008." |
On another topic, the Government this week confirmed that the new ISA rules outlined in last December’s Pre-Budget Report will be introduced in April 2008. Until then, it’s business as usual. The new rules should not impact on your ISA decision either this tax year or next. For more information see our previous story
More Commentary