How to buy gilts

by Ed Bowsher on 04 February 2012  |  1 comment
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Ed Bowsher looks at how you can purchase gilts and whether they're a sensible investment. He also looks at index-linked gilts.

In the first part of this article, I looked at what gilts were and what drives their investment performance. Now it’s time to look at how to invest in them.

You used to be able to buy gilts via the Post Office, but sadly that’s no longer the case. If you want to buy new gilts at a gilt auction, you can find out when the next issues are via the Debt Management Office (DMO).

Then if you wish to buy, you’ll have to register with Computershare, an agent of the DMO. You’ll also have to be accepted onto the Approved Group of Investors – essentially that’s to verify who you are and to check you have the funds.

This is all a bit of a palaver, so it may be simpler just to buy gilts that have already been issued. You can do this via a stockbroker or a bank.

Your other option is to put your money in a fund that invests in gilts. You can find a list of such funds here. The top-performing fund – the Schroder Institutional Long Dated Sterling Fund – has delivered a 26% return over the last year and a 107% fund over the last decade.

The Schroder fund isn’t the only one that has done well, so why have gilts delivered such excellent returns?

Controversy

Well, that’s a controversial issue. Here are four possible explanations:

1. The UK is a safe haven thanks to George Osborne’s austerity policy

Many people believe that George Osborne’s commitment to cut Government spending has reassured the markets that the UK won’t default. So UK gilts are seen as a safe bet during turbulent times. As the value of Greek Government bonds has tumbled, gilts have become ever more expensive.

2. The UK is a safe haven for other reasons

The UK Government is lucky in that it doesn’t face a massive volume of gilts maturing in the next few years on which it will have to pay out. That reduces the chance of default.

3. Inflation will stay low

The UK economy looks weak and that means inflation may stay low. We might even have deflation where prices fall. If you expect inflation to be low, you’d normally expect gilt prices to rise and yields to fall.

4. The stock market has had a rotten decade

Share prices have performed very badly since 2000. Some investors have taken money out of equities in despair and gone for bonds instead. Especially pension funds. Pension funds have also been under pressure from regulators to move money from the stock market and into gilts.

So should you invest in gilts now?

Well, they’re normally seen as a relatively low risk investment, but there’s a danger. If inflation takes off, gilt prices will fall and you could lose money.

If you’re worried about that risk, you might prefer to go for index-linked gilts, known as ‘linkers.’ With linkers, the coupon (or dividend) you receive rises in line with inflation. So does the principal (or repayment) value that you’ll receive when the gilt matures. However, the yield on linkers tends to be low and they won’t be a great investment if inflation falls to a very low rate or we end up with deflation.

Personally, I’m not going near gilts, index-linked or conventional. I can’t see much upside and I’d rather take the risk of investing in the stock market and hope for a better return. After a rotten decade, prospects for the stock market over the next ten years look better. But if you’re more risk averse than me, some index-linked gilts might make sense.

More: How Britain beat the world in 2012  A great way to invest