increase in government bond purchases as inflation increased
In 2023, retail investors flocked to gilts and passive funds in an attempt to diversify their risks against economic instability and profit from yields driven higher by high interest rates.
The second-largest investing platform in the UK, Interactive Investor, reported a 607% increase in gilt purchases in 2023 year over year. Additionally, the platform experienced an 828 percent increase in gilt purchases in the third quarter of 2023 compared to the same period the previous year.
Throughout the year, gilt purchases also increased; in the third quarter of 2023, purchases jumped by 81 percent when compared to the second quarter and by 340 percent when compared to the first quarter.
According to Myron Jobson, senior personal finance expert at Interactive Investor, “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.” However, in a high interest rate environment, bond investments may yield larger returns.
As interest rates increased significantly beyond the very low levels observed during the financial crisis, gilt demand skyrocketed. The Monetary Policy Committee stated that interest rates would need to remain high for a “extended period of time” and that more rises would be required. As a result, the BoE kept its base rate at 5.25 percent on Thursday. Bond yields increase and prices decrease when interest rates rise.
Those that bought gilts in 2023, however, received a range of yields. In terms of total return, net of interest paid, the iShares Core UK Gilts ETF, which follows the FTSE Actuaries UK Conventional Gilts All Stocks Index, has decreased 1.6% since the year’s beginning.
Hargreaves Lansdown senior financial analyst Hal Cook stated that investors who invested in a variety of gilts have “broadly ended up where they started.”
Returns differ according on when gilts were purchased, but the investment platform states that holders of gilts saw a gain until the middle of April, then saw a decline in value until the final week of October.
“As things stand, anyone who bought from the end of May onward is likely to be in profit,” Cook stated.
Some investors are giving up on their search for an active fund that can yield higher returns.
Caldwell Kyle
Wealth management Evelyn Partners stated that all 10 of this year’s best funds on its platform, Bestinvest, are entirely or primarily invested in stocks, even in the face of rising bond yields. That stated, however, bond funds are becoming more and more popular.
Eight of the top 10 bestselling funds on Interactive Investor were passive funds; the top three funds were the Vanguard US Equity Index fund, Vanguard LifeStrategy 80% Equity, and its 100% Equity variant, Vanguard LifeStrategy 80% Equity. Six out of the top 10 funds at Evelyn Partners were passive funds.
But the most popular fund according to Interactive Investor was the actively managed Fundsmith Equity.
According to Kyle Caldwell, collectives editor at Interactive Investor, “some investors are giving up on finding an active fund that could deliver better returns.”
“An additional motivator is the uncertainty among investors regarding where to allocate their funds currently, considering the abundance of obstacles.” Consequently, investors are favouring the wide exposure that passive funds offer over more targeted active fund exposure.
