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At FundCalibre, we are advocates of good, actively-managed funds. We acknowledge that not all fund managers will be good at their jobs, but we think we can identify those funds we believe to be ‘Elite’ – whose managers will consistently beat their benchmarks over time.
However, there is always an exception to the rule and, as you may have noticed, there are no Elite Rated UK government bonds, or gilt funds, as they are sometimes called. The reason for this is that it is almost impossible for a fund manager to add value in this asset class.
Looking back over the past 10 discrete calendar years, just two gilt funds out of 42 have managed to beat the index* 50% of the time. Most managed to outperform just once or twice.
Why is this? In most asset classes there are many different variables which can affect the valuation of a company, but this isn’t so for gilts. You’ve basically just got interest rates, inflation and economic growth to go on and the forecasting of each is extremely hard to get right. Gilt volatility is also very low, so there is very little room to add value.
The same can be said for government bonds of other countries with a strong credit rating, like Germany and the US. It’s only once you starting looking at places like peripheral Europe and emerging markets, where credit risk becomes another variable, that you get the extra volatility and a chance to make a difference.
So what’s the point of an actively-managed gilt fund? We’ll risk upsetting a few people now by saying we don’t think there is one. Yes, gilts have an important part to play in an overall portfolio, as they are negatively correlated to equities. However, we’d argue that most investors would be better off getting this exposure via a more diversified strategic bond or multi-asset fund – let a professional manager dip in and out when they have high conviction and stand a chance of making some money.
*Source, FE Analytics, total return, bid-bid. Index used: FTSE British Government 10-15 years.