News Archive

The following is a part of the series of timely market comments by City Financial fund managers. We hope you find these thoughts helpful. – Andrew Williams, Chief Executive, City Financial

“Interest rates cut to 3%! …None of the 60 economists surveyed by Bloomberg News predicted the move” – Bloomberg

Last month we issued our market comment entitled “The King is dead. Long live the King” arguing that sharp cuts in UK base rates were inevitable and that investors needed to give serious consideration to the implications of rapidly falling returns on cash deposits. It has been demonstrated this week that the fear of recession is paramount to the Bank of England.

What does this mean?

All over the UK advisers are re-evaluating their client portfolios with a mind to preserving capital and maintaining a degree of performance.

Indeed following today’s dramatic 150 basis point 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 the potential return promises to fall significantly below the level of base rates once the LIBOR markets return to normality – as is gradually now occurring. This will take place even without further cuts in base rates which are still on the horizon.

What do investors and their advisers need to do?

One way investors can safeguard their income and return in the face of rapidly falling interest rates is to purchase government guaranteed bonds – gilts which offer a fixed rate of return.

At present ten to twenty-year gilts offer returns of almost 5% which are fixed for the life of the bond. Moreover, as gilts are traded on a daily basis the money is not “locked up” and is available on virtually instant access (unlike one-year Building society bonds which deny access to the money for 12 months). In addition there is the prospect of capital gains on the gilts as yields fall.

Investors and their advisers need to start to consider these matters now – it is no good waiting to discover the returns on their deposit account have shrunk to negligible levels as it is very unlikely that when this occurs that gilts will still offer 5% yields.

Holding gilts directly, however, is something many investors are reluctant to do. The clearest way then to access the gilt markets is through a gilt fund. By trusting the expertise of a proven team of fund management professionals an investor can rest assured that they have intelligently and deliberately opted for exposure to an asset class which is logical in today’s climate, while safeguarding their ability to liquidate into cash.

We remain available for advisers who wish to discuss how exposure to gilts can be an effective way of balancing both safety and return.

Best regards,
Ian Williams, Fund Manager - Strategic Gilt Fund