Investments

UK investors load up on gilts and passive funds in 2023


Unlock the Editor’s Digest for free

Retail investors poured money into gilts and passive funds in 2023, as they looked to capture yields driven up by high interest rates and to spread the risks of economic uncertainty.

Interactive Investor, the UK’s second-largest investment platform, saw a 607 per cent rise in gilt purchases in 2023 year-on-year, while purchases of gilts on the platform in the third quarter of 2023 rose by 828 per cent compared with the same period last year.

Gilt buying also accelerated throughout the year, with purchases in the third quarter increasing by 81 per cent compared with the second quarter and by 340 per cent against the first quarter of 2023.

“The performance of gilts and investment bonds more broadly have disappointed in recent history because inflation and interest rate rises have hurt bonds as the returns they pay became less attractive,” said Myron Jobson, senior personal finance analyst at Interactive Investor. “But investing in bonds can offer potentially higher returns in a high interest rate environment.”

The surge in demand for gilts came as interest rates rose far above the relatively low levels seen since the financial crisis. The BoE held its base rate at 5.25 per cent on Thursday, with the Monetary Policy Committee saying interest rates would need to stay high for an “extended period of time” and that further rises might be needed. Rising interest rates cause bond prices to fall and yields to rise.

However, investors who purchased gilts in 2023 saw mixed returns. The iShares Core UK Gilts ETF, which tracks the FTSE Actuaries UK Conventional Gilts All Stocks Index, is down 1.6 per cent since the start of the year in total return terms, net of interest paid.

Hal Cook, a senior investment analyst at Hargreaves Lansdown, said investors who put their money into a wide range of gilts have “broadly ended up where they started”.

Returns vary depending on when gilts were bought, but according to the investment platform, gilt holders were in profit until the middle of April, before losing value until the last week of October and then seeing a jump in value from that point.

“Anyone who bought from the end of May onwards is likely to be in profit as things stand,” said Cook.

Evelyn Partners, a wealth manager, said that despite rising bond yields, all of this year’s top 10 funds on its investment platform, Bestinvest, are wholly or predominantly invested in equities. However, bond funds are rising in popularity, it said.

Passive funds accounted for eight of the top 10 bestselling funds on Interactive Investor, with Vanguard LifeStrategy 80% Equity, its 100% Equity variant and Vanguard US Equity Index fund in second, fourth and fifth place. At Evelyn Partners, passive funds accounted for six of the top 10 funds.

However, the actively managed Fundsmith Equity topped the Interactive Investor list of most-bought funds.

“Some investors are throwing in the towel on trying to find an active fund that could deliver better returns,” said Kyle Caldwell, collectives editor at Interactive Investor.

“Another driver is that investors are unsure where to put their money at the moment, given there’s no shortage of headwinds. As a result, the broad exposure passive funds offer is being favoured, rather than investors targeting more focused active fund exposure.”



Source link

Leave a Reply