AJ Bell Youinvest Fundamentals – Vanguard UK Inflation-Linked Gilt Index GBP A Gross (Acc)


Welcome to the latest edition of Fund-amentals.
This time around I’m going to look at a passively-managed member of our list of 72
favourite funds, namely Vanguard UK Inflation-Linked Gilt Index fund. Vanguard is one of the largest investment
companies in the world with a long history of managing passive strategies and this fund
is a tracker too – there is no fund manager here, just a programme that ensures the fund
provides the performance of the underlying assets as closely as possible, minus its running
costs. This Fund tracks the Barclays UK Government
Index-Linked Float Adjusted Bond Index, which focuses on bonds that trade freely in the
market and come with maturities greater than one year. Most importantly, as the name suggests, the
bonds are index-linked. Known as ‘linkers’ these traded debt instruments have both their
principal – the amount you get back when the bonds mature – and their coupons – the
interest rate you get during the life of the bonds adjusted according to inflation. More
specifically they are adjusted to the retail price index, or RPI inflation, not more the
consumer price index, or CPI, which is generally better known. The good news, therefore, is the value of
the coupons increases if inflation increases. The bad news, therefore, is a drop in the
rate of inflation, or even deflation, could see the value of the Gilts fall and their
coupons diminish. This chart here shows that the UK has only
seen prices fall according to the RPI just once since records began in 1949 – and that
was in 2009, right at the end of the financial crisis. Over the last 68 years, RPI inflation has
averaged 5.4% and since 1990 it has averaged 3.1%. The tracker provides exposure to a basket
of 28 different UK Government index-linked Gilts. As we can see there, the vast majority of
the linkers have a coupon of between 0% and 4%, although the yield to maturity will potentially
differ from that, depending on the performance of the underlying bonds. Remember that, just
like a share, the higher the bond price goes, the lower the yield on a bond, and vice-versa. The linkers are all AA-rated, as that is the
UK Government’s credit rating, while the average maturity of the 28 bonds in the portfolio
is long. This graphic shows the range of maturity by years and the effective maturity is nearly
24 years, while the effective duration is just over 22 years. Vanguard is a massive fund manager and its
economies of scale means that it can run its funds cost-effectively. That is reflected
in the lowly 0.15% ongoing charge for this tracker fund. Note that we are talking about the fund’s
accumulation units, so it will automatically reinvest any coupons from the underlying Gilts
for you. Vanguard UK Inflation Linked Gilt Index fund
is eligible for SIPPs, ISAs and dealing accounts and the initial minimum investment is just
one share. As a final point, please be aware that units in the fund currently sell for
around £184 each. So – those are the mechanics. The question
to address next is why could investors consider this fund for portfolio inclusion today? The major reason is clearly inflation. If
you think inflation is coming, the index-linked Gilts are one way to protect yourself, as
their coupons will rise in line with RPI inflation. And, as we can see here, inflation has crept
higher over the past 12 months or so. If you think we’re really on the verge of a globally
synchronised recovery, that low unemployment is about to spark wage growth, banks are about
to start lending and that central banks have left interest rates too low for too long then
this may be one way to protect your money and its real, inflation-adjusted value. But this is not to say that the Vanguard UK
Inflation Linked Gilt Index fund will suit every investor. After all, you may take the view that inflation
is not going to gallop higher, or even stay elevated. You may feel that weakness in the
pound and strength in oil explain 2017’s increase in inflation, which you may see as
a temporary surge rather than something more profound. After all, rising global indebtedness, weak
demographics in the West (fewer people of working age, more of pensionable age) and
the internet are all deflationary forces. If this is your belief then you may feel index-linked
Gilts, and a tracker fund that follows them, is an insurance policy you do not need, especially
as this fund has already done well – so if inflation eases – or even gives way to
deflation (no matter how unlikely THAT seems) then the underlying Gilts and therefore the
tracker could do less well or even fall in value. What this does go to show is that investors
must therefore do their research on Vanguard UK Inflation Linked Gilt Index fund to make
that it fits with their overall strategy, target returns, time horizon and appetite
for risk before they put any capital to work. Thank you for watching and I look forward
to seeing you next time.

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