Fixed Interest as an Asset Class and What Fixed Interest to hold in a Charity Portfolio

1. Fixed Interest as an Asset Class and What Fixed Interest to hold in a Charity Portfolio Philip Todd 14th May 2013

2. Asset Class Returns *Estimate Source: Morningstar Direct

3. Bonds Expensive or Cheap?

4. UK & US Government Bond Yield US bond yields last at these levels in 1947 – returned -1.6% PA next 30 years.* Source: Bloomberg *Source: The Economist

5. Bond Yields Interest Yield – the annual gross income expressed as a % of the current value • Cash:£100,000; interest rate 0.5%; annual income £500; interest yield 0.5% • Shares:£100,000 (100,000 shares at 100p); dividend rate per share 3.32p; annual income £3,320; interest yield 3.32% • Gilt:£100,000 worth (£83,319 Treasury 4% 2022 priced at £120.02 = £100,000) • Coupon is 4% • Annual income is £3,332.76 • Interest yield is 3.33%

6. Bond Yields • Treasury 4% 07/03/2022 gilt (interest yield 3.33%) • Current price is £120.02 • But at 07/03/2022 that £120.02 falls to £100 • For your £83,319 nominal of this Treasury 4% 07/03/2022 you will get £83,319 – a loss from now of £16,681 • However, you will receive £1,666.38 every 6 months up to and including 07/2022, a total of £29,994.84 • Gross Redemption Yield is 1.57% (better than cash?; less than inflation?) Gross Redemption Yield – is a measure of a bond’s future return if it is held to maturity. It is expressed as a % and takes into account the time value of money, accrued interest and any capital gain or loss on redemption. It is expressed as an annual % return.

7. Bond Yields *Prospective Real Redemption rate on projected inflation of 3% Source: Morningstar Direct

8. What Fixed Interest to hold in a Charity Portfolio?

9. Economic Backdrop You need to have a view of the world. In the UK • Currency - Sterling has not shown to be a good store of value (and is unlikely to be for the foreseeable future). • Inflation/Deflation - Central Bank finds inflation helpful. The alternatives are growth (proving problematic) or default (unattractive) • Interest Rate Direction - the next interest rate move is likely to be a rise

10. UK RPI post the Second World War Source – Office of National Statistics, Ingenious Asset Management

11. Financial Repression – Inflation • Grow • Default • Debase Source: Office of National Statistics

12. Gold versus Sterling Number of Gold Troy Ounces per £1000 Source: Thompson Reuters Datastream

13. Norwegian Net “Debt” Norway, General Government Net Debt % of GDP Graph Source: Thompson Reuters Datastream, The Economist (*6 Year),

14. Fixed Interest Exposure in a Charity Portfolio • EIB NOK (Norwegian Kroner) 4.25% 2017 • AAA rated Supranational Bond • M&G UK Inflation-Linked Corporate Bond Fund • Exposure to index-linked UK Corporate issues – individual issues can be illiquid • PIMCO Global Real Return Fund • Exposure to the equivalent of UK index-linked gilts around the world with underweight/overweight views on geographic and duration positioning.

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