Substitute for UK Gilts

All,

Would you please assist with my question below:

Assuming I have a balanced portfolio (Bonds/Equities etc) where roughly 10% of my exposure is to UK Gilts. I am afraid that rates will go up so I want to find a substitute for Gilts in such a way that I will keep my risk profile roughly the same?

Any ideas?

Many thanks in advance.

Comments

  • You could hold cash in a savings account if you are worried about losing money. Pretty much guaranteed up to £75k. Probably pays about the same interest as a gilt. However there is still the argument that gilts could give you diversification and negative correlation with your equities if things get really bad (again). Who knows what the trigger may be but if there is a crash in equities, money could flow to gilts as a safe haven giving a potential capital gain. So treat them like an insurance policy. Hopefully you have had some decent gains in the past.

    Could look at index linked gilts although they are expensive with yields at inflation minus 2% on average.

    How about US Treasuries? Higher yield than gilts which anticipates interest rate rises to a point but you need to deal with the currency issue (there are probably ETFs that invest in US Treasuries and hedge the currency).

    Sterling denominated corporates with AA credit rating would be close to risk profile of gilts but don't give much extra yield (if any) and rising rates would affect them in the same way
  • Thank you for your answer. A couple of comments:

    Let's approach the question from an institutional investor point of view not necessarily individual.

    I understand the recommendation for IG Corps but would you please clarify the option for inflation linked Gilts?

    Do you mean that we 'll see rates/yields going up when there is growth in the economy in which case people will shift money from gilts to equities (so yields up) and therefore as a result of growth we will also see inflation start picking up? So shifting the exposure from vanilla gilts to inflation linked gilts you are having similar risk profile being protected from increasing rates?

    Also the other alternative I was thinking was the case of Equity Market Neutral Hedge Funds so that you get a similar yield with gilts keeping the risk at low levels. What's your thought on this?

    Last, do you think infrastructure investments could be a potential alternative? The risk seems to be different than interest rates however I am afraid the investment horizon is quite longer than, say 10Y Gilts.

    Many thanks in advance.
  • Infrastructure investments, a possibility, but however lots of money has been placed with such funds, question to ask is whether this money is driving up the valuations of the limited infrastructure assets available, which may not be sustainable?
    Not to say that I haven't myself place limited funds into HICL, JLEN, JLIF, UKW, MXF in order to have a good diversified portfolio
    Inflation Linked Gilts & Bonds I believe are expensive, and like an insurance policy, will only pay good returns if a claim (or interest rates rocket up) is made (occurs).
    However I do still have a holding in RBPI which was purchased close to the issue date (& has done well)
    Be interested in other peoples views!
  • thank you for your comment.
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