Indeed, FE Trustnet found that some mixed-asset managers intentionally breached their equity limit just to get away from the gilt market.
Things didn’t turn out as expected however; according to FE data, IMA UK Gilt and IMA Index Linked Gilts are among the five best performing sectors of the last two years, with returns of 18.03 and 15.37 per cent respectively.
Performance of sectors over 2yrs
Source: FE Analytics
Hindsight is, of course, a wonderful thing. Two years ago, investors were buoyed by improving corporate profits, the FTSE was up 55 per cent over a two year period, and gilt yields were at record lows, so it’s no surprise that equities were in higher demand.
The unpopularity of gilts is little changed though, with many multi-asset managers reporting that they have no exposure to them whatsoever. Our readers are of a similar opinion; according to the latest FE Trustnet poll, the majority of investors believe UK government debt is more risky than both developed and emerging market debt. This is in spite of the fact that gilts have proven to be significantly less volatile than both in the short, medium and long-term.
Of 567 respondents, 48 per cent said gilts were the riskiest of the three areas, 34 per cent chose emerging market equities, and the remaining 18 per cent went for developed market equities.
However, FE Alpha Manager David Coombs, head of multi-manager at Rathbones, believes investors would be wrong to dismiss the asset class. He has recently upped his exposure to gilts, and anticipates his weighting to increase further in the coming months.
“I’ve bought some 30 year gilts this week, as it happens,” he said. “It’s not because I think they’re terrifically valued, but they’re a good hedge.”
Coombs has recently taken profits in what he deems as “expensive” corporate debt in his Rathbone Multi Asset Total Return Portfolio, and put some of that money to work in the equity market.
“I’ve bought some gilts as well, to offset this risk,” he said. “If things go wrong in the eurozone again, I want something to give me some downside protection, and gilts are great for that.”
The manager thinks there is currently upside potential in gilts, and says sceptics should take a closer look at valuations elsewhere before deeming them expensive.
He said: “There’s a growing argument that real yields will stay negative for some time. If austerity continues and we don’t see any growth from the private sector, we’re likely to see more quantitative easing, which will probably drive yields down further.”
Commenting on the poll, he said: “Are gilts the riskiest of these three choices? Absolutely not. Over the next 12 months I wouldn’t say gilts will give you a load of money, but if you compare them to corporate debt and even equity income, they’re not all that expensive.”
“I’ve got 6.5 per cent in gilts at the moment, only 1 per cent of which is in conventional gilts, but I’d be very surprised if that didn’t increase significantly,” he said.
FE Alpha Manager James Sullivan, co-manager of the CF Miton Special Situations Portfolio, also believes investors would be wrong to write off gilts.
“We’re certainly not bullish, but we’ve seen yield come out a little bit recently and are looking at them,” he said. “There are worse things to be holding at the moment, put it that way.”
If you expect an inflationary environment, inflation-linked gilts are also an area which deserves some attention. Ruffer’s Steve Russell, who believes inflation could hit “high-single digits” within the next decade, has 10 per cent of his Ruffer Investment Company in linkers.
Neil Shillito, director of SG Wealth Management, can see the merits of holding gilts, but doesn’t think there’s enough upside potential given the improvements in macro conditions.
“If someone told me they had 20 per cent in gilts as a hedge, I think they’d be well within their rights,” he said. “Personally, I believe we’ll look back in 18 months time and say we were pretty close to the bottom of the market.”
“Risk appetite is increasing, albeit steadily, and I can’t see another collapse on the horizon.”