Strategic Gilt Fund

Key points

• The Fund invests only in UK gilts. There is no corporate exposure of any kind.
• The Fund was launched on 8 December 2006 and is managed by Ian Williams of Charteris Treasury Portfolio Managers.
• The Fund utilises the Charteris process of writing options on the underlying portfolio, with the aim of enhancing the total risk-adjusted return of the portfolio and reducing volatility.
• Sector: IMA UK Gilts

Current views

Following today’s dramatic rate cut by the Bank of England, UK base rates are now down to 3%. This means that for the average saver with a traditional bank or building society deposit account returns will likely fall significantly below the level of base rates once LIBOR markets return to normalcy – as is gradually now occurring. The Fund will position itself to take maximum advantage of the changes likely to occur in the gilt market as investors realise returns on cash have become negligible and gilts offer the liquidity and security they seek.

During the month of October the gilt market, as measured by the FT Government Securities Index, finished the month approximately where it began. The Fund displayed similar characteristics. Moreover, there were some discernible movements in the shape of the yield curve. Yields on three to four-year Gilts fell from ~4% to ~3% whilst yields on gilts with maturities of between 10 and 25-years rose by approximately 20 basis points. Yields on ultra long 50-year Gilts were largely unchanged.

This yield increase in the ‘hump’ of the curve was not beneficial to the Fund as this is where the bulk of the Fund is allocated. Despite this fact the NAV of the Fund did perform in line with the Index for the month of October when the movements in the curve should have led to the Fund underperforming the Index.

Looking ahead we continue to expect cuts in interest rates on top of the 150 basis points announced today and therefore continue to believe that the 10 to 20-year area is the most attractive part of the gilt market. At present the yield in this market segment is just under 5% whereas ultra short and ultra long yields are down to just above 4%.

November 6th, 2008