What length of UK Treasury Bonds ?

[Prime_Mover]

I am looking to move into a PP shortly moving cash ISA'a into the four relevant sectors of the PP roughly at about the same time for each one.

Moving into the PP for me is (re-balancing aside) is a long-term (20 year+) buy and forget project.

I presume there is no point in trying to 'time' these purchases as that is not the basis of the portfolio philosophy.

The impression I get is that even if I'm buying bonds that are over or under-priced now it doesn't matter as they are there to balance the portfolio over the long term during times of differing financial climates.

However with regards to UK Treasury bonds is there any point in trying to mix the lengths of them or should I just buy a lump sum of the longest I can find or even undated bonds?

Is the Vanguard UK Long Duration Gilt Index a decent alternative - most of it is held in Gilts above 15 years and appears to passively track UK Gilts at a 0.15% management fee.

Any comments gratefully received.

[gizmo_rat]

Hi P_M, and welcome to the forum.

As you may be aware the vanilla PP uses the longest dated bonds for maximum volatility, so there's no reason to purposely mix the lengths.


On the face of it undated Gilts look ideal, but there are a couple of caveats you need to be aware of;
Firstly, they are callable which means the Government can buy them back at their face value ( or par) at anytime.
Secondly they are thinly traded which means that there is typically a much wider spread between buying and selling prices than typical gilts.

The Vanguard fund is fine (average length is 28.8 years) but you are paying .15% management fees for something that doesn't really need managing, unless of course you want to avoid the twice yearly dividend from a directly held Gilt. However in general for risk reduction Harry Browne advised that you should hold your assets as closely as possible, so own the bond directly. 

The longest dated ordinary Gilt is GB00B54QLM75 which matures in 2060 so you can buy it and roll it over in about 20 years.

http://www.fixedincomeinvestor.co.uk/x/ ... &groupid=3

The only catch I've had with buying Gilts is that if you are using a web based broker you may find that they are hard to find and they may not set up properly. So if you can't find them or you get unexpected errors when purchasing just ring them and do it over the phone.

[Prime_Mover]

Thank you very much g-r for your guidance re undated gilts and the link which is also very helpful.

I knew I was missing something!

You are correct regarding web brokers and purchasing gilts. I ran the concept past the one I am thinking of using and they told me it would have to go through their telephone service instead so potentially adding a bit to what was a very reasonable flat fee arrangement because they operate on an 0845 number.

Has this issue ever caused any problems when re-balancing your gilt allocation (assuming you have of course) in terms of getting deals done in good time or isn't it really in practice that time critical?

[gizmo_rat]

No not at all it's not really a time critical thing, any big moves tend to happen over a period of months, any short term moves are just noise that might go in your favour and might not, nothing you can do about them.

As a general point of principle you might consider calling your broker / bank on the geographical telephone number that corresponds to their 0845 number which you can look up here.

http://www.saynoto0870.com/search.php


At the risk of teaching you to suck eggs, there's a handy broker cost comparison table to see if your brokers charges are in the right kind of area.
http://monevator.com/compare-uk-cheapes ... e-brokers/

In principle (unless you have special requirements) you can set up a PP for as little as £20 with no ongoing costs.

You should also check that your broker is registered with the FCA
http://www.fca.org.uk/firms/systems-rep ... ter/search 

Don't forget that the FSCS compensation limit is 50K so if you invest more you should spread it over multiple registered brokers.

[Toby]

Hi folks,

I'm really glad I came across this thread. I'm a PP newbie. I just read Rowland's PP book and was looking for the best option for bonds when I found this forum.

Along the way I realised that my current broker that I just recently signed up with (BestInvest) charges me a 0.4% / annum fee that I hadn't noticed. Doh! So now I'm looking for a new broker too.

gizmo_rat, thanks for your recommendation of the monevator broker comparison table, that's super useful. When you say you could set up PP for as little as £20 with no ongoing costs, do you mean with iWeb? They look like the best deal to me for my circumstances. I have about ~£100k that I'd like to invest in a trading account. Although based on your advice I should really be opening two or more accounts each with <£50 in them. How do people with £1M do it? They must have 20 brokers. Not that I expect to have to worry about that any time soon 

[Lotus_Eater]

I'm looking at the same thing you guys are here. The PP book talks about using IGLT for the bonds but to keep a higher percentage. Does anyone have any experience on what percentage has worked best historically?

On a similar subject; does anyone know of any portfolio back testing software/sites that enable us to back test UK ETF's? There are a million of them for US issues but I'm darned if I can find anything decent for UK stuff.

Thanks,

LE

[Observer]

Another thing about purchasing long term bonds in funds like vanguard, spdr, and the more expensive ones like henderson, is that they all have OTC derivatives exposure in them - which is potentially another risk so i agree with gizmo rat to stick within the 50k per fund per name rule if possible, and also to purchase direct treasury stock to avoid counterparty risk. However the spreads for purchasing treasury stock are pretty horrendous - i have used hargreaves lansdown and they basically charge what they want , its quite funny really

does nayone have additional information on OTC counterparty risk in mutual funds and how they could lead to unintended risks for investors?

thanks

mitul

[Observer]

Toby - i think people with £1 Million go direct to the treasury via the DMo site - also for the cash portion you could use national savings which is 100% backed by the treasury so you have no default risk or counterparty risk there, this is cheaper than buying short term gilts and you can rebalance a lot quicker and cheaper - it sgreta to have some UK people to connect with :-)

[Toby]

Observer, thanks for the tips on DMo and national savings!

[gizmo_rat]

Just to round this off, all undated UK Gilts are effectively no more.

https://www.gov.uk/government/news/chan ... d-war-debt

It is a sign of our fiscal credibility