Report: IMA UK Gilt

The IMA require funds to have invested at least 95 per cent of their assets in Sterling denominated triple A rated debt securities, with at least 80 per cent invested in UK government securities or 'Gilts'.

Fund launches where prominent over the year and were fuelled by growing investor nervousness towards equities in the credit crunch era. As corporate profits became strained, dividend yields dwindled and gilts became a popular haven for investors’ cash.

Despite the average gilt fund yield falling from 5 per cent over the last year to its current 3.7 per cent, as a result of falling interest rates, the UK is in recession so there is still demand for these safer securities.

However it is likely gilt funds will not see the same level of prosperity as they did in 2008, and the sector entered 2009 with a loss of 5.5 per cent over January.

Three year returns stand at an average of 9.3 per cent – therefore given that many fund managers are saying equity markets have bottomed out, longer-term investors may prosper from the higher yields and attractive valuations offered by equity income funds at present.

Risk, which remains an important factor in the current investment climate, is where gilt funds still shine – with the sector posting a relatively low average 10.2 per cent annual volatility over the last year – three times less than their racier equity alternatives.

Ignis Asset Managements’ Renfield arm stands out amongst its peers with a range of outperforming funds. The Renfield UK Mid Gilt fund was the top performer over the year posting 16.7 per cent with below average 8.4 per cent annual monthly volatility. The fund currently yields 4.2 per cent and is impressive over the long-term with a near 40 per cent gain over a three year horizon.

Ignis Asset Management also offer a UK Short Gilt which maintains a low risk profile and high return and the Ignis UK Long Gilt fund compensates slightly raised risk with a higher return – all of Ignis’ offerings outperform relative FTSE British Government Gilt indices.

The Allianz PIMCO Gilt fund is also worth a gander, given its remit to maximise total return with capital preservation in mind – coupled with the fact that PIMCO is one of the world's largest bond fund managers and has a strong track record of fulfilling set objectives. The fund boasts a convincing 12.3 per cent one year return, lower then average 9.3 percent annual monthly volatility and a relatively high 4 per cent yield.

Outlook

The Investment Management Association (IMA) released its 2008 summary for sales of UK domiciled open-ended funds where it was clear that the most popular asset class for retail sales over the year was bonds – with net retail inflows of £3bn. A stark contrast to equity funds which saw a net retail outflow of £1.6bn.

The IMA’s data highlights the shift made by retail investors from equities into bonds as they defensively position their portfolios in search of stronger yields – Financial Express data supports these findings and highlights that the fund attracting the highest net retail inflow in this sector over the last six months has been the Allianz PIMCO Gilt fund.

With the UK economy officially in recession the outlook for equities remains gloomy and the low 0.28 correlation to the FTSE All Share this sector holds means that one can reasonably expect it to remain a popular choice for investors seeking to preserve capital during these uncertain times.

Despite investment grade corporate bonds offering compelling yields, having already priced in a full-fledged recession, investors should remain cautious as defaults and downgrades are on the way – which can also impact safe asset classes through risky deposits. For example Standard Life’s Sterling Money Market fund saw aggravated losses in asset-backed securities last month.

Overall gilts remain a safe haven for investors’ savings and look more promising then pure money market funds given that interest rates are low and banks have been on the verge collapse – a situation in which investors could only reclaim up to £40,000 of their cash deposit. Gilts on the other hand are fully backed by the treasury, which has never failed to make interest or principal payments, and in a worst case scenario can print money in order to fulfil their dues.

*Source of data: Financial Express Analytics