What caught my eye this week.
Technology marches on. I almost got knocked over by a stealthy Tesla this morning. The electric vehicles proliferate along my street like units spawning in a real-time strategy game.
Meanwhile, Apple is readying its Vision Pro headset to immerse us in new realities – or at least its App store – while chatbot AIs conspire in the wings. India just launched a mission to the other side of the moon.
Monevator is not being left behind in this tumult. That’s right! Thanks to your support and the efforts of our hard-working engineer(s), we’ve finally enabled reader edits in our comment section.
That’s right, no need to regret one ‘s’ too many in the word ‘recession’ anymore. When you post a comment, you will have five minutes to give it a read through and tweak. You can also delete your comment entirely if you have second thoughts.
For Monevator members, there’s no time limit. Your comments will always be editable and can be deleted, provided you’re logged-in and posting under your registered email address.
Update 18/7/2023: Following reader feedback and further thought, we’ve decided allowing comments to remain open forever could have more downside than upside. However I’m also increasing the time limit for editing to 10 minutes, which I hope should cover most scenarios!
Say what?
Our comments are home to excellent discussions, and I’ve long resisted tampering with a winning formula. But editing has been requested many times. Hopefully this strikes the right balance.
One worry I’ve had is a rare malicious poster manipulating their comments for nefarious reasons. The timer should restrict the scope for that. We’re implicitly trusting members to be good actors by removing the time limit for them.
But just to be safe, all edits are tracked and stored. If someone does say something just to start a row and then sneakily goes back and changes what they wrote – a big reason I’ve avoided allowing edits for so long – then we’ll know.
For 99.9% of you this is irrelevant. But trolls beware!
Otherwise bumper links this week, with lots to be discussed. How crazy is that graph of parental help for house deposits? Then there’s the pension shake-up shenanigans…
Enjoy the reading – and maybe the writing and – have a great weekend.
From Monevator
How well do commodities protect against UK inflation? [Members] – Monevator
Interest rates on cash at investment platforms – Monevator
From the archive-ator: Summertime [2020] and the living is queasy – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Mortgage rates hit a 15-year high in Britain – Which
Renting a room tops £700 a month; £971 in London – Guardian
GDP fell 0.1% in May – Guardian
Bank of England: mortgage defaults rise 30% in three months – This Is Money
National debt could reach 300% of GDP by 2070s, says ONS – Sky News
Ripple notches landmark win with SEC over cryptocurrency – Reuters
Home ownership in Britain has become a hereditary privilege [Search result] – FT
Pension raid to boost blighted Brexit Britain* news mini-special
‘Mansion House reforms’ seek to channel pension savings into unlisted firms [Search result] – FT
All the official pointers and documents regarding Jeremy Hunts proposals – GOV.UK
Rolling the dice on British pensions [Podcast, excellent overview but the call for local authority apparatchiks to make sub-scale investments in unlisted local projects using other people’s life savings is bonkers IMHO] – A Long Time In Finance
How to opt out of Hunt’s risky plans for your pension [Search result] – FT
Pensions industry tries to get to grips with ‘avalanche’ of developments – Pensions Age
I told you so – Monevator
*I may be editorializing a tad.
Products and services
Coventry’s new easy access account pays 4.5%; four withdrawals a year – This Is Money
TSB launches £200 bank-switching offer – Which
Transfer your SIPP to Interactive Investor in July and get from £100 to £3,000 in cashback, plus pay no SIPP fee for six months. Terms apply – Interactive Investor
NS&I boosts rate on one-year bond to 5% – NS&I
UK banks improve rates for savers after FCA meeting [Search result] – FT
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
What to do if your phone gets stolen – Which
MMM reviews his Tesla Model Y – Mr Money Mustache
Amazing UK homes to rent, in pictures – Guardian
Comment and opinion
Passive investors: enough with the puritanism – Humble Dollar
Labour’s plan will not transform UK’s poor economic prospects [Search result] – FT
Gen Z want to work ‘lazy girl jobs’. Who could blame them? – Guardian
Bill Bernstein revisits The Four Pillars of Investing – Morningstar
Wealthy UK borrowers face interest-only mortgage shock [Search result; yep] – FT
Should emerging markets play a role in your portfolio? – Morningstar
Why 1966 was the worst year to retire – Think Advisor
Understanding Fat FIRE: an in-depth guide – Of Dollars and Data
UK consumers splashed the cash, and helped push prices up – David Smith
Have older investors become too aggressive? – Morningstar
Career – Indeedably
What exactly is your problem with stock index concentration? [Search result] – FT
A blueprint for peak retirement – A Teachable Moment
Naughty corner: Active antics
UK PLC going cheap. [I wonder what happened in 2016…?] – Merryn via Twitter
Private equity firms add debt. That’s just about it – Verdad
The UK market boasts an abundance of high-yield stocks – UK Dividend Investor
A first-half investment trust portfolio review – IT Investor
Are you a good investor? – Maynard Paton
This US small cap has paid an unbroken dividend for 205 years – Motley Fool
Ten graphs that show how the year has been full of surprises (as usual) – Bilello
Signs of hope for late-stage private market valuations – Axios
Kindle book bargains
Money Men by Dan McCrum [On the Wirecard fraud] – £2.99 on Kindle
The Ride of a Lifetime by Bob Iger – £0.99 on Kindle
How to Own the World by Andrew Craig – £0.99 on Kindle
Environmental factors
How alt fund managers became green energy leaders – Institutional Investor
Orca whales are ramming boats. Why? – Guardian
How ancient ‘skywells’ keep old Chinese homes cool – BBC
Scientists are ready to formally declare the Anthropocene era – Sky News
Will you catch dengue fever in Europe this summer? – Which
Researchers find 176 bird species using man-made materials in nests – The Conversation
Scientist says we’re in “uncharted territory” after world’s hottest week on record – Lad Bible
Turning humid air into renewable power – Guardian
Robot overlord roundup
How AI chatbots can help you understand – Humble Dollar
Off our beat
What did people do before smartphones? – The Atlantic via MSN
Do hard things if you want an easy life – Darius Foroux
What to make of physicist’s claim to alien discovery? – The Conversation via Yahoo
The 2023 Comedy Pet Photography Awards, in pictures – Guardian
The story behind the Mission Impossible theme tune – The Honest Broker
Peak China and the coming of ‘Altasia’ – Noahpinion
And finally…
“Reps, reps, reps.”
– Arnold Schwarzenegger, Total Recall
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
For a long time we couldn’t compare the rates of interest on cash in investment accounts for one simple reason.
Brokers weren’t paying any interest on cash!
Rising rates have so dominated the news for the past 18 months that it’s easy to forget that interest rates were near-zero for more than a decade.
Even savings accounts at your bank paid no interest. So your online broker 1 was more likely to send you a Christmas hamper from Fortnum and Mason than to cough up interest.
But now the Bank of England’s rate is 5% and everyone is giddy about cash again. (Let’s leave aside the fact that inflation in the UK is still nearly 9%…)
As a consequence, many investment accounts do now pay some interest.
Not all of them, not always very much, and it’s often difficult to find out exactly what interest rate they are paying – but it’s better than nothing.
You still won’t find these interest rates featured in our broker comparison table though.
You can blame the platforms for that.
(Don’t) show me the money
It’s easy to point the finger at faceless corporations for making life hard for the little guy.
And believe me, I have been blaming not them but my co-blogger The Accumulator for the past few months for the lack of an interest rate column in our table.
“Let’s include interest on cash in investment accounts in our broker table,” I intoned from my lofty throne, like Zeus commanding the lesser gods to do his bidding.
The Accumulator looked up.
“Um, that’s an interesting idea *cough* something *cough*,” he said, before going back to doing whatever he wanted to do as usual.
This time The Accumulator was engrossed in a couple of months of deep-diving into commodity correlations.
What a thrill-seeking hedonist, I snorted. Why can’t he simply collate the interest paid on cash in investment accounts with the rest of the data he trawls to keep our table updated?
“Fine! I’ll do it myself!” I harrumphed.
Yeah that was a stupid idea.
The Accumulator is a platform maven. My co-blogger navigates the Byzantine information silos that pass for a broker’s help pages like a spaniel sniffing for truffles.
So at the least he would have confirmed the woeful job some platforms do of highlighting their rates of interest on investment accounts much quicker than I did.
But I don’t think he would have found all the data. In fact I suspect he knew this was a Sisyphean nightmare – hence his evasive action.
And so even as Monevator readers too called for rate data to be included in our modestly famous comparison guide, The Accumulator bumped around in his fat-suit, plotting lean hog futures against corporate bonds and keeping his head down.
Interest on cash in investment accounts at a few platforms
Maybe you’re thinking that this is where I’ll reveal that – after a week spent combing the platforms, calling their service desks, and meeting their hired representatives in the shadows of Canary Wharf – I’ll now unveil a comprehensive guide to interest rates at every broker out there?
Reader, your faith is touching.
But unfortunately I ran out of puff.
For example I spent half an hour digging around Lloyds Banking Group’s website to no avail. Both when navigating its own menus and when swooping in over the walls with a targeted Google raid.
At the time of writing I still don’t know if Lloyds pays interest on investor cash! Perhaps I’m missing something obvious but the information has eluded me.
At least its High Street rival Barclays clearly states it pays no interest on cash in investment accounts. And it only took me a couple of minutes to find that out.
It was similarly hit and miss with the other platforms.
Maybe this isn’t entirely nefarious obfuscation on certain platforms’ part. I get the impression today’s much higher interest rates have caught some platforms on the hop, like they have the rest of us.
Remember how Vanguard seemed to almost accidentally be paying a high interest rate earlier this year? And then how it at least appeared to revise the rate down when we noticed?
It could be a factor, but remember that uninvested cash left lying around in customers’ accounts is a profit center for most financial services companies. Pooled together, it can earn a decent chunk of interest that boosts their bottom line – at the expense of our own.
So they do have business reasons not to want their customers thinking too hard about interest.
Okay, now show us the money
Just to complicate matters, most of the platforms that do pay interest will give you a different rate depending on how much cash you have on their platform.
Which clearly makes doing any side-by-side comparison even trickier.
So for now I’ll just post a taster comparison. Focusing shamelessly on those platforms who offer us an affiliate fee should anyone sign-up, as compensation for my suffering.
But we will revisit and expand this table in a few months when – like a mother who gets broody again after she’s forgotten the experience of child birth – I have forgotten the pain.
Note: Rates are changing frequently. These are the latest as I write.
Examples of rates of cash on investment accounts: ISAs
As I discuss below, big gobs of cash should really be held in a cash ISA. But here’s what you’ll get with a few different investing platforms with a share ISA.
| Platform | Interest rates (range) | Notes |
|---|---|---|
| AJ Bell | 1.7% to 2.2% | Better rate is above £10,000 |
| Bestinvest | 4.1% | High rate on all accounts |
| Dodl by AJ Bell | 0% | Free dealing quid pro quo? |
| Hargreaves Lansdown | 2.5% to 3.5% | Four tiers up to £100,000+ |
| Interactive Investor | 1.5% to 3.5% | Three tiers up to £100,000+ |
| InvestEngine | 0% | Free dealing quid pro quo? |
| Plum | 2.99% to 3.82% | Higher with premium plans, cash must be moved into ‘pocket’ |
Examples of rates of cash on investment accounts: SIPPs
Rates of interest on cash held in pensions are generally a little higher. That’s good, given the difficulty of accessing or moving money held in a SIPP.
| Platform | Interest rates (range) | Notes |
|---|---|---|
| AJ Bell | 2.95% to 3.45% | Better rate is above £10,000 |
| Bestinvest | 4.1% | High rate on all accounts |
| Dodl by AJ Bell | 0% | Free dealing quid pro quo? |
| Hargreaves Lansdown | 3.2% to 4% | Tiered, higher in drawdown |
| Interactive Investor | 2.25% to 3.5% | Three tiers up to £100,000+ |
| InvestEngine | n/a | Doesn’t offer SIPPs yet |
| Plum | 2.99% to 3.82% | Higher with premium plans, cash must be moved into ‘pocket’ |
Where else to stash your cash
Excuse me for stating the obvious, but you don’t need to have your portfolio’s cash allocation kept in an investment account with your broker.
You’ll generally earn better interest elsewhere.
Cash can just accidentally accumulate with your broker, of course. Especially if you’re an active investor or you own a lot of income funds without dividend reinvestment switched-on.
But I also see people holding cash with their brokers as a result of mental accounting.
They think “I have £200,000 in my stocks and shares ISAs and I want some of that in cash as a safety cushion”.
Really they’d be better off holding that cash elsewhere and thinking of their assets holistically.
Sometimes you may have a good reason to hold cash in an investment account.
Perhaps you’re building up dividends for a particular purchase, or maybe you’re a naughty active investor indulging in a bit of (ill-advised) market timing. Or you’ll hold cash in your pension because you reason that adding to that bucket has special constraints – yet you want to really dial down the risk.
Still, the rate of interest on cash in investment accounts is so low that it is unlikely to be your best choice on even a short-term time horizon.
On a longer timescale it will cost you for sure.
So where should you be parking your cash for the longer-term?
Cash ISAs and savings accounts
You can get a much higher rate of interest with cash ISAs and standard savings than at your broker.
In an ideal world any strategic cash allocation – held say as part of a Permanent Portfolio-style plan – would be nestled inside a cash ISA, where it can grow unmolested by HMRC.
With interest rates now half-decent, beware that you won’t need a vast balance in a non-tax-sheltered saving account before you’ll be paying tax on interest.
Anyway, just don’t make the mistake of thinking you need cash in the same account as your shares or similar. Think holistically about your investing (and your net worth for that matter).
I do this via a master spreadsheet. It pulls together all my ‘pots’ and other assets – including my own home – via a bunch of dedicated sub-sheets.
Money market funds
If for some reason you don’t want to (or can’t) keep your portfolio’s long-term allocation to cash in a proper cash ISA, then money market funds may pay you a higher rate than your platform.
My co-blogger’s view is the teeny-tiny risk that comes with even the best of these funds – because they are funds, not cash – is not worth a slightly higher interest rate.
Read his comprehensive piece on money market funds to find out why.
I’m a little more sanguine. I wouldn’t keep all my cash in a money market fund (and my cash would only usually be a relatively small part of my portfolio, anyway) but I don’t think a toe in this pond will hurt in 99.99% of alternative histories. Legitimate money market funds almost never fail.
And even if something should go wrong, it’ll probably only cost you a delay in access or – worst case – a couple of percent in a very dire scenario. (I don’t think anything as bad as the latter has ever happened with a mainstream UK/US money market fund, for context.)
Still, there are risks. From market turbulence to incompetence to fraud and more.
Cash is cash and nothing else is cash.
Index-linked and conventional gilts
As I write you can earn more than 5% on a one-year gilt held to maturity.
That’s very hard to beat. There are tax advantages too if your cash is outside of a shelter.
Index-linked gilts pay a much higher real yield (because your 5% nominal on a vanilla gilt or cash in the bank is -4% in real terms with inflation at 9%). But they come with other complications.
Bonds have been terrible assets to own for the past couple of years. But over the long-term they’ve beaten cash on an annualized basis, and you’d expect them to do so in the future.
However even short-term conventional gilts are relatively volatile compared to cash.
Everything is volatile compared to cash!
So if you want your cash-like allocation to be unchanged day-to-day, then it has to be cash.
Other kinds of bond funds, and alternatives
Corporate bonds, high-yield bonds, REITs, absolute return hedge funds, infrastructure trusts…
…whatever bracket you want to include these in, they are not even close to cash.
Generally you should think of them as part of your equity allocation – not fixed income – when you think about your portfolio’s risk profile.
I won’t write more here because – yes – only cash is cash. These ‘cash proxies’ certainly aren’t.
How much interest on cash does your favourite broker pay?
To wrap up, you may have noticed that I have used the phrase ‘interest on cash in investment accounts’ several times in this article.
That’s because as mentioned we will eventually collate and update a table of rates for all the major brokers. And my SEO minions (um, that’s me and TA, armed with Google) have told us to put down a marker in advance, which we will revisit when we have all the data.
(This, incidentally, is also why you might feel like you’ve read the same story about your favourite 1990’s film star’s new spouse a dozen times. It’s a sorry side-effect of the modern Internet.)
Anyway, how about we crowdsource a few more brokers’ interest rates payable?
If you – whether as a user or an employee disguised as a user – can point me in the comments below to a URL that clearly lays out the interest on cash in investment accounts at a particular broker, then I will gratefully include it when we revise this post.
(Bonus marks if you can embarrass me by pointing to the rates at Lloyds…)
In the first instance we’ll add to the tables here. Later we can embed them on the broker comparison page.
Unfortunately the multitude of different tiers the brokers use mean it’ll probably be too much to ever expect a clear column making it easy to compare the different platforms’ rates.
Which, cynically, I expect is by design not accident.
Do you know the secret spot where your coy broker reveals what it pays in interest on cash in investment accounts? Let us know in the comments below.
- Also known as platform. They’re synonymous.[↩]
What caught my eye this week.
A new study from The Centre for Policy Research reckons the UK citizenry has £1.8 trillion (yes, that’s with a ‘t’) tucked away in cash and National Savings and Investments accounts.
That’s comparable to the total market capitalization of the entire UK stock market.
With inflation near-9% and even the best cash accounts still paying only 5-6%, cash is hardly a bankable strategy to solve all our savings needs. Especially when most of it won’t be earning anything like Best Buy interest rates.
What’s more, the implication that the British public could swap all their cash savings to become the collective owners of Great Britain PLC – as listed, anyway – is beguiling.
As a card-carrying capitalist, that’s the kind of taking back control I could get behind.
Opportunity cost
To quote from the report’s executive summary:
Britain’s neglect of retail investing is surprising in both practical and ideological terms.
In practical terms, incentivising more retail investors, and encouraging more retail investment, should increase the amount of deployable capital available across the UK economy. It should help individual companies achieve their full potential, support economic growth at a national level and, in turn and in time, reward those who have made those investments.
In a 2017 paper for the Centre for Policy Studies (CPS) on the retail bond market, Rishi Sunak pointed out that 55% of the US population was then invested in the stock market, vs just 19% of Britons. ‘That division,’ he said, ‘represents a vast store of underworked capital.’
Little has changed since then; recent statistics from UK Finance suggest that 10.6% of UK household financial assets are currently held in equity, compared to 36.2% of US households.
Moreover, thanks to modern technology and the growth of investment apps the barriers to entry are historically low – certainly when compared to buying property. The ideological arguments are equally strong. Retail investing can be rewarding on an individual level, in terms of self-actualisation and self-worth. But it also gives people an opportunity to shape the companies they invest in – to literally become an owner, which includes the right to vote on corporate pay, environmental issues and governance. More retail investment gives people a stake in the society and the economy of which they are part.
All music to my ears. Obviously we’re champions for long-term investing in equities and other assets, and for people taking charge of their own finances.
The report’s recommendation to scrap the distinction between cash and shares ISAs seems especially overdue.
And encouraging a stronger connection between people’s thinking about capitalism and the bounty we enjoy would be an almighty win.
I’ve long-lamented how so many prosper under our market system and free trade while simultaneously moaning about and decrying it – blaming corporations for everything rotten on the left, or turning to nationalism and protectionism on the right.
A true shareholder democracy could be run more for the many than the few(er).
Reality returns
However even as the site’s resident (naughty) active investor, I do wonder about some of the report’s other proposed solutions to getting more people invested.
Deliberately trying to involve more everyday punters in IPOs, say. Or curbing the risk disclaimers around investment products.
These things are only a panacea in an ideal world, where people do even half as much research about investing as they put into planning their holidays – and where the typical financial advisor is more like a doctor than an estate agent, or worse.
Two decades of writing and talking about investing at Monevator leads me to suspect that a dash for retail’s cash would cause as many problems for everyday investors as it would solve.
If we could get several million more people investing more in low-cost index funds then sure, that’d be great.
If millions more people learned about and followed a sensible path to financial independence, the only downside from my perspective would that this website would be out of a job.
But you hardly need to be Martin Scorsese to picture what directing £1.8 trillion in cash towards far-riskier assets gate-kept by a freshly-deregulated financial services sector could look like.
Not so much The Wolf of Wall Street as The Silencing of the Lambs.
Tell Sid to leave the fantasy stockpicking-for-all stuff back in the 1980s.
Have a great weekend!
Assets do not exist in a vacuum. The late great Harry Markowitz won the Nobel prize for economics for showing that a diversified portfolio is superior to putting all your eggs in one basket.
More modestly, I’d counter that the same thing that crashed the price of index-linked gilts over the past 18 months also walloped a bunch of other assets.
The villain is, of course, the inflation surge, and the rapid ascent of interest rates in response.
Rising rates did for index-linked gilts, drowning out gains made from higher than expected inflation.
That reset was predictable (the timing and speed wasn’t) but it’s still been shocking to watch.
Every asset class whacked by rates
In fact nearly all assets took a beating in 2022 for much the same reasons.
And the pain has continued in 2023 for the most rate-sensitive assets.
The past week alone has been tough, as the City took peak rate expectations to 6.5%:
Financial markets bet on Thursday that the Bank of England will raise interest rates to a 25-year high of 6.5% early next year, up from a previous expected peak of 6.25%, pushing the yield on short-dated government bonds to their highest since mid 2008.
Rate futures showed a roughly two in three chance that the BoE will have raised rates to 6.5% or higher by its February 2024 meeting, up from 5% now.
Warren Buffett likens interest rates to gravity. That’s on account of how rates affect every aspect of finance.
Hence all assets were repriced as Bank Rate rose 20-fold from 0.25% to 5% in a year and a half.
Shares fell, naturally. Especially growth stocks.
Risk-averse investors might usually enjoy a snicker on seeing thrill-seeking equity investors getting their just deserts, but not in this crash. Safety-first investors were roughhoused just the same.
Besides index-linked gilts (aka ‘linkers’), conventional bonds – government and corporate – have been thumped. So too the supposedly boring ‘bond proxies’ invested in by those who chased higher yields, who feared a bond crash, or who preferred the hope of some growth in their paltry income and so bought dividend stalwarts like Diageo or trusts like Finsbury Growth & Income.
All down, down, down.
Normally some asset class does well in a rout. But very little has prospered for long in the declines of 2022 onwards, except for a few niches like energy stocks and UK large caps. Investors of all stripes have been carried out on their shields.
Yet for those with the appetite – and the dry powder – to sally forth once more, all this carnage also makes for opportunities.
I just wrote 6,000 words for Mogul members about index-linked gilts, for example.
And that too-vast word count was even after I removed a section about alternatives, out of mercy for my readers. Instead I’ll run through a few below.
Again, if this week in the markets is anything to go by then the pain is not yet over for these usually less volatile assets.
But I have to think we’re closer to the end than the beginning for the big falls.
Vanilla gilts and other bonds
Like linkers, conventional gilts crashed in 2022. Anything beyond toddler-level duration plunged in price as yields rose on higher rates.
Horrible for standard 60/40 portfolios. But it was even worse if you were a cautious type and so invested in an extra-conservative portfolio that was more overweight in gilts.
This is strikingly illustrated by charting the performance of Vanguard’s LifeStrategy funds over the past 18 months.
- The LifeStrategy fund with 80% in higher-risk equities did best.
- The version with only 20% in equities and 80% in bonds fared worst.
Source: Trustnet
Whenever I update this chart, I’m honestly staggered.
I fretted about a bond market crash a decade ago. By 2015 I thought – wrongly – it might be upon us. The Accumulator ran the numbers in 2020, and again in 2021. Over and over we warned that while government bonds were generally a less risky asset that could cushion your portfolio when equities fell, they were not risk-free. Especially not in real terms, and when sporting low-to-negative yields after years of barely-there interest rates.
Yet despite all that, I still gasp when I see this chart.
Goodness knows what the average LifeStrategy investor has made of this experience. Whatever we want to tell ourselves after this bond crash for the ages, I doubt anyone buying into the LifeStrategy 20% Equity fund before 2022 saw the potential for the Bizarro World chart above.
So much for our dark yesterdays. The good news is the crash has taken yields back to saner levels.
You can now get a 5.5% yield on a one-year gilt, for example. That’s compares – ahem – very well to 0% in 2020. It’s competitive with all but the very best buy savings accounts in July 2023.
What’s more, gilts are free of capital gains tax. The coupon on most short-duration gilts is very low – from 0.25% to 2.75% – so the yield-to-redemption largely comprises a capital gain. As I said you don’t pay tax on the capital gain, just income tax on the coupon. This makes gilts particularly attractive right now for those with cash outside of tax shelters who pay high income tax rates.
Gilts are government backed so there are no credit risk or FSCS limit issues. (You might still worry about your platform…)
Of course these are nominal yields – far below CPI of 8.7%. So a negative real return, currently.
However if you think inflation will fall sooner than expected, you might buy ahead of a re-rating.
More importantly for investors socking away money for the long-term, there have been worse times to top-up to your government bond fund in a balanced portfolio. (The past decade, for a start!)
Bolder or more active investors might also look at corporate and high-yield bonds. Just remember that these will usually fare worse if all these rate rises ultimately send us into recession, and so make it harder for companies to meet their obligations.
Whatever you do don’t write off bonds completely on the back of a bad crash.
Bonds are governed by maths and – at least in nominal terms – I’d say the sums are now much more attractive.
As with all the assets in this article, we might well have to suffer more pain until the interest rate cycle finally turns though.
Perhaps one answer is to slowly build up towards your desired position over time – the way we more typically talk about pound-cost averaging into equities?
Annuities
Arguably the big one, and for a typical retiree probably better than mucking about with gilt ladders. Especially if you plan to live a long time and you buy an annuity with inflation protection.
Annuity providers use government bonds to back their guarantees. So there’s a direct relationship between annuity payouts and gilt yields:
Annuity income – Ages 65 and 60, £100,000 purchase, joint life 2/3rds and level payments
Source: William Burrows
Unlike with a retirement bond ladder, with an annuity you won’t run out of money if you overstay your innings. The company pays out until you shuffle off.
Also, by pooling many holders together the annuity provider spreads longevity risk. This improves the attractiveness of annuities for the average policy holder. (A few unlucky souls lose out).
On the other hand, once you buy an annuity your capital is more or less sunk. With an index-linked ladder you can sell up for cash if required.
Annuity providers are (understandably) taking a slice of our pie too. That’s why they’re in business.
Obviously a lot to think about. Consult professional advice if you need it.
For much more on index-linked gilts and linker ladders, please see my huge article for Moguls.
Infrastructure investment trusts, renewables, and other alternatives
These were a long favourite of yield-seeking private investors. But veteran readers may recall I was wary, not least due to how they invariably traded on high premiums.
That was my loss for many years, perhaps. Trusts could and did issue more shares at premiums, and they did so to grow. This funded new asset exposure, and by extension their dividend growth.
Whether shareholders understood this was going on is another matter!
Either way, the wheels came off in 2022. Higher rates tanked infrastructure trust share prices. They have continued to fall in 2023 and most are now on big discounts.
For instance, the popular HICL Infrastructure (Ticker: HICL) went from a 20% premium in summer 2020 to a 20%+ discount today:
Source: AIC
Pretty breathtaking – especially as the NAV reportedly rose nicely over that time. But the market clearly has its doubts.
In theory infrastructure trusts offer some inflation-protection – either explicitly in their contracts or implicitly due to the nature of their assets. (For example, a toll road can raise prices).
But higher interest rates also means higher discount rates applied to asset valuations / future cashflows. (Ironically, pretty much the same thing that hammered racier growth stocks.)
It’s all pretty complicated and the picture varies from trust to trust. Some seem set to be more responsive to inflation than others; with pretty much all the least we can say is there appears to be a lag!
Are infrastructure trusts now bargains? Maybe. HICL yields over 6%, and the big discount would seem to price in a lot of pain.
But the recent debacle with Thames Water – an infrastructure asset, you’ll note – has opened up a new front for the forces of fretfulness.
Thames Water is carrying many billions in debt. Bad enough from a confidence perspective. But there is an extra wrinkle in that its income is linked to CPI inflation, whereas the debt is based on the (higher) RPI measure.
The Financial Times notes that:
Surging inflation might at first glance appear beneficial for a regulated water company that is able to pass on costs to its consumers. But a mismatch between the measures of inflation Thames Water uses to hedge its debt and to price its customers’ bills has caused a growing strain on its balance sheet.
More than half the group’s debt is linked to inflation, meaning interest payments increase as inflation steps up, which the company has justified by noting that customer bills are also linked to it.
However, the debt is linked to one measure, the retail prices index (RPI), which is at a historically wide premium to the other, the consumer prices index adjusted for housing costs (CPIH), which the majority of its bills are now priced against.
I wonder if this is a problem for UK-focused infrastructure assets more widely?
You would certainly want to dig deep into the individual trusts, or at least buy a basket. They are all slightly different under the tin. And often in ways that will only become apparent under duress – such as the sudden death of the zero-interest rate era.
Moreover some assets – particular with renewables – may only be leased to the trust for 25 years. They aren’t perpetual owned. (This isn’t necessarily a bad thing. But you need to know.)
Oh, and as for my schadenfreude at infrastructure trusts finally falling from their sky-high premiums…
…well, over the past six months or so I invested just under 2% of my net worth into infrastructure trusts at various prices – and they’ve continued to fall.
Ho hum.
Commercial property REITs and funds
Same again. Valuations smashed with rate rises, big discounts on REITs, debt an issue especially with some smaller players, superficially attractive dividends, and a nervous market.
Commercial property is perhaps even riskier than infrastructure in that the one thing that really seems to have changed following the Covid pandemic is the demand for office space.
Then again, property – and property funds – are age-old assets, whereas the track record of listed infrastructure and renewable trusts is only a couple of decades long.
Eventually you’d think redundant buildings could be put to new uses (apartments, say) or they may fall off the market in disrepair, increasing the value of what’s left standing.
In theory the replacement cost of offices has risen with higher inflation, too. And normally rents would also be rising – if it wasn’t for that pesky virus.
It’s a bit of a mess, and I’m not foaming at the mouth. Once bitten, twice shy.
Still, never say never again.
NS&I savings certificates
I’m mentioning these because many of us have a legacy holding that’s among our most cherished portfolio constituents. They have been the best inflation-proofing asset a retail investor could own.
You can’t even buy new inflation-protecting savings certificates from National Savings anymore. But for the past decade or so you’ve been able to rollover expiring certificates into new multi-year certificates, albeit at derisory yields.
Indeed a savings certificate that’s rolled over in July 2023 will bag you the princely interest rate of 0.01%, plus inflation linking on the CPI measure.
Against that linkers now offer real yields as high as 1% or more. And until 2030 index-linked gilts will continue to track RPI inflation. As mentioned, RPI is typically higher than the CPI measure.
It’s worth noting too that a little discussed change to the certificate small print means you can no longer cash in NS&I savings certificates early. You must hold them to term. That surely further reduces their attractiveness and versatility versus index-linked gilts.
So is it time to switch to linkers?
Maybe – or at least maybe partially, if you have an outsized holding. The certificates’ real yield is derisory, the inflation measure is now less attractive, and NS&I appears determined to kill them off.
However I’ll be keeping mine. They are only 2% or so of my portfolio, and once you cash them in that’s it.
Also certificates have one big edge left over linkers.
Unlike with index-linked gilts, the index-linking from certificates is effectively suspended if inflation turns negative. This would make certificates more attractive assets to hold in a deflationary period. Even their tiny coupon could be very valuable.
No alternative to making your own mind up
As ever, I’m sharing all this to offer a snapshot of the landscape – particularly for those of you who (for your sins) invest actively.
I am not – as the house troll put it in the comments the other day on one of my co-blogger’s commodity posts – “pushing” any of these assets.
You’d hope that’s clear from the fact that I’ve raised loads of downsides too. This on top of the even more obvious point that there’s nothing in it for me to ‘push’ this or that asset onto readers.
Push membership? Sure, fair enough. That’s existential for the future of our site.
But we don’t benefit one way or another if you buy commodities, gilts, or anything else. Completely obviously, you’d think.
Trolls are gonna troll I guess.
For most of us this a difficult time to face decisions as an investor. Indeed a huge benefit of investing passively in index funds according to a preset strategy is you avoid all this mental drama.
Those of us who do deviate will always face risks. Our troll will continue to never put a foot wrong, and compound his billions into trillions thanks to the benefit of hindsight. Here in the real world the rest of us will win some and lose some.
It could well be that we’re still early into this great rate rout, for all that it feels late in the day. So please do your own research and make your own mind up.
Oh, and incidentally, as I always stress but some never hear, these alternatives aren’t mutually exclusive. You don’t have to choose, say, linkers over certificates. You can own both if you want to.
Investing isn’t like Xbox versus PlayStation. The more the merrier with diversification, up to a point.
That ‘point’ is where the assets no longer deliver any attractive returns in themselves. If you buy a small and overly-indebted property REIT and it goes bust, don’t go crying to the memory of Harry Markowitz!
