Gilt funds also have an identical FE Risk Score to those in the Cautious Managed sector, even though these funds can have up to 60 per cent of their portfolio invested in equities.
Riskiness of IMA sectors
| Name |
FE Risk Score |
1-yr volatility (%) |
| IMA Global Bonds |
20 |
4.27 |
| IMA Sterling Corporate Bond |
21 |
4.24 |
| IMA Sterling Strategic Bond |
22 |
3.73 |
| IMA UK Gilt |
33 |
6.30 |
| IMA Cautious Managed |
33 |
6.07 |
Source: FE Analytics
FE Risk Scores calculate volatility relative to the FTSE 100 index and are more responsive to recent rather than long-term trends. The FTSE 100 has a fixed FE Risk Score of 100 and the volatility of other markets, funds and instruments are scored against it.
The study highlights the increased level of risk in the government bond market, even though the majority of investors still view the sector as a safe haven during times of uncertainty.
David Roberts, who heads up the Kames Sterling Corporate Bond and Strategic Bond funds, says the day-to-day volatility in the gilt market is at the highest he’s ever seen.
"Put it this way; in the five minutes we’ve been speaking, 10-year gilts have moved by two or three basis points. A few years ago that would have been high for a week," he said.
"Of course, if you buy gilts to maturity, risk hasn’t really changed. Though debt is still mounting, UK government debt is still AAA-rated."
"However, for an open-ended fund manager who is always reinvesting their cash and who rarely holds a bond to maturity, the level of risk in the market has risen significantly."
"If you buy into the gilt market today, the chance of your losing money, or indeed making money in the next couple weeks, has increased. The market is nowhere near as predictable as it has been in the past."
Performance of sectors over 2-yrs
Source: FE Analytics
Roberts says the mass flows in and out of the gilt market are causing the unprecedented volatility.
"It’s the classic risk-on risk-off trade; equity markets do well for a period and then when performance is poor investors pile into gilts and push prices up. Then when equities start performing again there’s a mass sell-off [of gilts], and the cycle repeats itself."
"Because of recent mass inflows, yields have also fallen to record levels. This means you’re getting both a lower expected return and greater volatility," he added.
As a result of this volatility and more attractive value in the investment grade corporate bond sector, Roberts has significantly decreased his exposure to gilts in recent weeks.
"A month ago government bonds made up 25 per cent of the [Kames Strategic Bond] portfolio, with gilts on their own accounting for 5 per cent. My total government bond exposure is now down to 15 per cent, while I have next to nothing in gilts," he explained.
According to FE Analytics, Roberts’ Strategic Bond fund has returned 43.11 per cent in the last three years, outperforming the average Sterling Strategic Bond fund by 11.1 per cent.
Performance of fund vs sector over 3-yrs
Source: FE Analytics
Graham Toone, manager of Margetts St Johns Realistic Core, believes these severe movements in price show that gilts are no longer the risk-free investments they once were.
When asked whether investors need to reassess their attitude to risk in the fixed interest sector, Toone replied: "Yes, absolutely. The market has been so distorted by quantitative easing in the last year that it is difficult to distinguish between risk-free and safe assets in the fixed interest sector these days."
"A study we did a few years ago confirmed that gilts were no longer a safe haven and we still have a fundamental issue with them now."