slide 1 ingenious asset management fixed interest as an asset class and what fixed interest to hold...
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Slide 1 Ingenious Asset Management www.ingeniousmedia.co.uk
Fixed Interest as an Asset Class
and
What Fixed Interest to hold in a Charity Portfolio
Philip Todd14th May 2013
Slide 2 Ingenious Asset Management www.ingeniousmedia.co.uk
Asset Class Returns
10 Years to End Dec 20122013
1 Jan 13 to 9 May 13Period Return
Cumulative Return
Annualised Return
Cash (Base Rate) 33.6% 2.9% 0.2%
FTSE Gilts All Stocks 76.7% 5.9% 0.8%
Index-Linked Gilts All Stocks 103.9% 7.4% 7.7%
Merrill Lynch Corporate Bond Index
80.0% 6.1% 5.0%
IPD UK All Property 75.9% 5.8% 1.7%*
FTSE All-Share 131.7% 8.8% 13.9%
*EstimateSource: Morningstar Direct
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Bonds
Expensive or Cheap?
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UKG10YR - Avr (5.28%) USG10YR - Avr (4.66%)
Source: Bloomberg*Source: The Economist
UK & US Government Bond Yield
US bond yields last at these levels in 1947 – returned -1.6% PA next 30 years.*
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Bond Yields
Interest Yield – the annual gross income expressed as a % of the current value
Cash: £100,000; interest rate 0.5%; annual income £500; interest yield 0.5%
Shares: £100,000 (100,000 shares at 100p); dividend rate per share 3.32p; annual income £3,320; interest yield 3.32%
Gilt: £100,000 worth (£83,319 Treasury 4% 2022 priced at £120.02 = £100,000)
- Coupon is 4%
- Annual income is £3,332.76
- Interest yield is 3.33%
Slide 6 Ingenious Asset Management www.ingeniousmedia.co.uk
Bond Yields
• Treasury 4% 07/03/2022 gilt (interest yield 3.33%)
• Current price is £120.02
• But at 07/03/2022 that £120.02 falls to £100
• For your £83,319 nominal of this Treasury 4% 07/03/2022 you will get £83,319 – a loss from now of £16,681
• However, you will receive £1,666.38 every 6 months up to and including 07/2022, a total of £29,994.84
• Gross Redemption Yield is 1.57% (better than cash?; less than inflation?)
Gross Redemption Yield – is a measure of a bond’s future return if it is held to maturity. It is expressed as a % and takes into account the time value of money, accrued interest and any capital gain or loss on redemption. It is expressed as an annual % return.
Slide 7 Ingenious Asset Management www.ingeniousmedia.co.uk
Bond Yields
Price Interest YieldGross Redemption
Yield
9 Year Gilt TR 4% 2022 £120.02 3.33% 1.57%
4 Year Gilt £104.24 2.64% 0.26%
25 Year Gilt £132.85 3.58% 2.92%
Treasury 4.25% 2027 £123.34 3.44% 2.31%
Index-Linked Gilt 1.25% 2027
£131.24 0.93% -0.78%*
M&G Corporate Bond Fund
167.16p 3.22% 2.26%
*Prospective Real Redemption rate on projected inflation of 3%Source: Morningstar Direct
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What Fixed Interest to hold in a Charity Portfolio?
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You need to have a view of the world.
In the UK
Economic Backdrop
• Inflation/Deflation - Central Bank finds inflation helpful. The alternatives are growth (proving problematic) or default (unattractive)
• Interest Rate Direction - the next interest rate move is likely to be a rise
• Currency - Sterling has not shown to be a good store of value (and is unlikely to be for the foreseeable future).
Slide 10 Ingenious Asset Management www.ingeniousmedia.co.uk
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
3,308
Cumulative UK RPI based at 1947
Source – Office of National Statistics, Ingenious Asset Management
UK RPI post the Second World War
Slide 11 Ingenious Asset Management www.ingeniousmedia.co.uk
Financial Repression – Inflation
Source: Office of National Statistics
Ap
r-0
9
0%
1%
2%
3%
4%
5%
6%
UK CPI target (2.0%)
• Grow
• Default
• Debase
Slide 12 Ingenious Asset Management www.ingeniousmedia.co.uk
Gold versus Sterling
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Number of Gold Troy Ounces per £1000
Source: Thompson Reuters Datastream
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Norwegian Net “Debt”1
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Norway, General Government Net Debt, % of GDP
Norway, General Government Net Debt % of GDP
Graph Source: Thompson Reuters Datastream, The Economist (*6 Year),
Slide 14 Ingenious Asset Management www.ingeniousmedia.co.uk
Fixed Interest Exposure in a Charity Portfolio
• EIB NOK (Norwegian Kroner) 4.25% 2017
- AAA rated Supranational Bond
• M&G UK Inflation-Linked Corporate Bond Fund
- Exposure to index-linked UK Corporate issues – individual issues can be illiquid
• PIMCO Global Real Return Fund
- Exposure to the equivalent of UK index-linked gilts around the world with underweight/overweight views
on geographic and duration positioning.
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Important Information
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