What caught my eye this week.

Every morning at 9.30am in New York, a bell is rung at the famous Stock Exchange to signal the start of trading.

It happens again with a closing bell at 4.30pm – repeating a routine that’s watched by almost nobody in the actual business of investing.

Okay, a few hundred floor traders are prompted to think about which route they’ll take home. A giddy CEO from a biotech wonders if they chose a diverse enough team to join them on the platform for the bell-ringing ‘ceremony’ they coughed up for. A retired dentist in Florida watching CNBC growls as yet another day’s viewing has not revealed what sank her 3M stock.

Elsewhere, data whips around the globe. A high frequency hedge fund manager visiting a server farm coughs politely and suggests her cabling could be at bit closer to the wall. A thousand crypto bros ply their trades, day and night. And a fund manager in Tokyo curses himself for snoozing through his alarm and missing the US close.

Major currencies and bonds can now be traded all day and night from Monday to Friday.

But US equities can only be traded out-of-hours in a half-arsed fashion – via wonderfully-named ‘dark pools’ if you’re an institution, or even the internal markets of certain US retail platforms like Robinhood.

And that isn’t good enough for some people.

Be a part of it

24 Exchange – a startup US trading venue backed by hedge fund manager Steven Cohen – has been looking to take trading 24-hours for years.

Its latest submission is with the regulators. Meanwhile the New York Stock Exchange is polling interested parties about how non-stop weekday trading could work.

The Financial Times notes the survey is being conducted by the New York Exchange’s data analytics team, rather than its management. It seems like a fact-finding foray at this point.

And one can certainly imagine all sorts of technical obstacles – from staffing to liquidity to compliance – that would challenge a stock market rolling along for 120 hours on the trot.

On the other hand, doesn’t it feel sort of odd that we still have set market hours?

The whole show is run by restless machines these days anyway, while cryptocurrencies have given the younger human participants a taste for always-on trading.

Google news stories about the New York poll and you’ll find most of the coverage is from the crypto sites. Not a coincidence.

There’s even an intellectual argument for 24/7 trading.

A stock’s price is supposed to reflect all known information about that company and its future cashflows.

But if an earthquake happens in San Francisco on Monday evening, say, a US company’s price is basically a stab in the dark until Tuesday morning.

Investors who want to react to the news cannot do so – except via overseas proxies, the futures market, or those alternative trading venues I mentioned. All of which have their own issues.

It’s up to you New York, New York

Whether reducing these ‘blind spots’ in pricing overnight – and even, conceivably, at weekends – would produce more accurate prices overall is an open question.

Already out-of-hours markets are bedevilled with illiquidity and glitchy pricing.

Long-time commentator Felix Salmon warns “off-hours markets can be treacherous places for investors” and reckons any 24-hour equity market would be a ‘casino’.

Writing on Axios, Salmon also notes that institutions already do most of their share trading around the market’s open and close, when liquidity is greatest.

So most of them wouldn’t want anything to do with buying Tesla shares at 1am on a Wednesday.

That would make official nighttime trading the domain of retail punters – and of those who’d prey on them.

Which probably wouldn’t end well for the punters.

“As any casino will tell you, risky gambles are more popular at night,” Salmon concludes.

Contrarily, some European insiders are discussing actually reducing trading hours on the continent. European trading hours are currently two hours longer than the six-and-a-half hours seen in the US.

The aim would be to shore up liquidity, rather than spreading it even thinner over a longer trading window.

These little-town blues

Where any of this would leave the poor old London Stock Exchange is anyone’s guess.

For many decades London profited from being in a convenient timezone between Asia and the US continent – as well from its ultra-close proximity to Europe.

Would London have more or less relevance in an always-on trading world?

Or are we anyway on a path to one exchange – in New York, which is already home to around two-thirds of global listed equities by value?

Who knows, but in the meantime the London market’s struggles continue.

This week we saw DarkTrace, Tyman, and Hipgnosis agree to bids from overseas acquirers. The £2bn drug maker Invidior also confirmed previously mooted plans to shift its primary listing to the US.

All in a day’s work for the shrinking LSE.

AJ Bells’ investment director Russ Mould warns the volume of firms being snapped up means “the UK market is experiencing death by a thousand cuts.”

Still, it’s an opportunity to profit if you’re an active investor. At least it is if you can figure out what’s truly cheap and/or potentially attractive, versus what’s a conked-out value trap. (Harder than it looks.)

Needless to say, passive investors owning global trackers can ignore all this noise with a wry shake of their heads – and then continue to go about their business of compounding their long-term gains, regardless of how and when the underlying shares are traded!

Have a great weekend.

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A new-ish short duration index-linked gilt fund from iShares gives UK investors an easy way to hedge against inflation – without taking on huge interest rate risk.

Now I realise that sounded like “schmargle bargle bumpty tumpty” to some readers.

So today I’ll explain as succinctly as I can why this new iShares fund should be good news for everyday UK investors like us.

/ programming interruption /

Update: 30 April 2024 – Very happy to confirm that this fund IS available to invest in with some major platforms, partly as a result of this article. So you can ignore the ambiguity below. However you may need to ask your own broker to add it to their platform before you can invest in it. Anyway, I’ll update this article to make this all clear when I get some time.

/ back to the show programming /

What’s that you say?

‘Should be’ good news?

Ahem – yes.

Alas there’s a catch. After a Monevator reader comment got us and others excited about this new fund, it transpires the reason we hadn’t heard of it seems to be because it’s institutional-only.

Which means peasants like us can’t get at it.

I say ‘seems to be’ because I haven’t been able to confirm this yet.

Certainly I can’t buy it on any of my platforms. Nor can Monevator contributor Finumus.

What’s more, I asked two brokers early last week whether they could make the fund available – including a giant famed for its supposedly-excellent service – and I’ve yet to hear a definitive answer back.

The signs are not good though.

Either way, I still think it’s worth us sticking our grubby noses up against the glass and gawping at this new model: the iShares Up to 10 Years Index Linked Gilt Index Fund (UK).

That’s because in our lusting over it, we can get a refresher as to why index-linked gilts can be tricky investments, despite their obvious appeal.

Want to go deeper after today’s drive-by? Then click the links throughout to learn more about inflation and index-linked gilts. You’ll surely impress your co-workers, classmates, and Tinder dates.

• See the iShares factsheet for all the pernickety details.

What is duration?

We’ll start with a necessary but quick recap – the meaning of short, long, and duration in bond jargon.

In this context, duration refers to how much a bond price is expected to move as interest rates move.

• High duration bonds (/bond funds) will tend to fall a lot in price when interest rates rise – and vice versa.
• Low duration bonds (/bond funds) mostly shrug and say ‘meh’.

This may appear to be another example of the investing industry taking a perfectly sensible word – duration – and then using it to mean something only its disciples can understand.

However there is an underlying connection here, too.

Because of the mechanics of how bond income is paid out before the capital value of the bond is finally returned, there’s a close correlation between a bond’s stated duration and the length of time the bond has left to run before it matures.

Bonds set to mature ‘shortly’ – typically in the next few years – have a lower duration than bonds with many years left on the clock.

The same applies to bond funds. If they own a lot of short-dated bonds – those maturing soon-ish – they will have a lower duration than funds stuffed with longer-dated bonds.

By the numbers

Duration is expressed in the literature as a number.

For example if a bond’s duration number is 11 then it:

• Loses approximately 11% of its market value for every 1% rise in its yield1
• Gains approximately 11% for every 1% fall in its yield

Again, read our article on duration for a much deeper explanation.

Why is duration so important with index linkers?

All bonds are affected by changes in interest rates. Hence all bonds have a duration metric. They will perform differently in different interest rate movement scenarios.

However index-linked bonds are extra complicated.

That’s because the very reason you’d own linkers is to guard your portfolio against unexpected inflation.

And what happens when we see unexpected inflation?

That’s right, interest rates tend to rise in response. As we all have visceral experience of in recent years.

All bonds with high duration figures will suffer when interest rates rise a lot.

But with normal ‘vanilla’ bonds you might shrug and say, “them’s the breaks, I bought my bonds to guard against low growth / deflationary environments. I can’t expect them to do well when inflation takes off”.

But with linkers you’ll likely feel gutted.

That’s because you bought linkers to hedge your portfolio against unexpectedly high inflation. You got high inflation – and yet your (longer duration) linkers fell in price anyway.

It’s a rip-off! Where’s Martin Lewis when you need him?

Note though you are still getting your inflation protection. It’ll be there in the price return, as per the mechanics of how the linkers’ coupons and repayment amounts are adjusted higher with inflation.

The trouble is with a high duration linker, the impact of rising rates can overwhelm the uprating from inflation, because inflation is leading investors to demand higher yields from bonds, driving down prices.

2022 and all that

It’s easier to appreciate how this can happen now we’ve lived through a definitive example.

The problem we faced in the run-up to the bond rout of 2022 was that real interest rates were very low.

The ‘real yield’ (that is, what was expected after inflation) on some UK linkers was minus 2-3% at one stage.

This meant that even if you held such linkers until they matured, you could expect to earn a negative annual return of minus 2-3%!

That’s dreadful enough. But you might be thinking: “Huh? My longer duration index-linked gilts were down 50% at one point in 2022. That’s much more than a 2-3% decline!”

No doubt. What happened was instead of taking your negative 2-3% lumps for two decades, you got most of them in one whack as rates rose far faster than anyone expected – and bond prices duly sank.

This brought forward the baked-in pain. (And left index-linked gilts on positive real yields again, incidentally.)

Why short duration index-linked gilts?

Exactly why index-linked gilts were ever trading at negative real yields is a question for economists, academics, and fans of the stage illusionist Derren Brown.

I know the conventional explanation, obviously.

Talk to a pension fund manager and she might tell you she had to own index-linked gilts at almost any price, because it best matched the liabilities of her beneficiaries.

Also, maybe it wasn’t actually a given that either interest rates or inflation would go higher in the foreseeable future? Or at least not as savagely as we saw over the past couple of years. They’d stayed ultra-low for a decade after all, confounding many investors’ expectations.

Personally though, I don’t think there was much excuse for buying linkers on negative real yields of -3%.

Yes interest rates were near-zero for years. But this hardly seemed likely to last – uninterrupted – forever.

Hence to me index-linked gilts seemed like a time bomb waiting to explode.

This isn’t hindsight speaking. We alerted Monevator readers about this risk many times, most notably in late 2016. We adjusted our model portfolio allocation accordingly, too.

Thank goodness in retrospect. And yet who knows? Maybe everyone was right in that almost anything could have happened, in other universes?

But then time rolled on. The dice fell as they did in this universe, and we got a crash that perhaps wasn’t quite ordained, but which did seem likely to happen, sooner or later.

DIY dilemmas

Anyway, pension funds and other institutions faced difficult choices in the near-zero interest rate era.

But private investors had an extra problem if they wanted to reduce interest rate risk while also owning index-linked gilts.

That’s because the best way to reduce interest rate risk – while still getting some lovely inflation hedging – from linkers is to own the shorter duration ones.

But not many private investors had the knowledge or nerve to buy individual short duration index-linked gilts in the market.

And unfortunately the only retail-friendly linker funds available were high duration.

For example, from memory the iShares core index linker ETF – ticker: INXG – peaked at a duration in the mid-20s! Talk about an accident waiting to happen.

INXG’s duration has come down a lot – to under 16 – after the big decline over the past two years. It’s still high though, when you remember what it implies about how the price will move with a 1% move in its yield.

With scant UK alternatives, for our Slow & Steady model portfolio my co-blogger The Accumulator chose to reduce duration by taking its bond allocation global.

He plumped for a currency-hedged, shorter duration fund that owns inflation-linked foreign government bonds.

This successfully reduced the S&S’s exposure to interest rate risk, thanks to the new fund’s lower duration.

But it did also mean this part of the portfolio was now hedging more against global inflation, rather than UK inflation. A reasonable proxy, but not ideal.

The iShares Up to 10 Years Index-Linked Gilt Index Fund

Instead we could opt for this new iShares fund next time, if we’re ever faced with the same challenge. (If we can buy it, of course…)

Launched in June 2023, the iShares Up to 10 Years Index-Linked Gilt Index Fund already has more than £700m to its name.

The ongoing charge figure (OCF) is just 0.13%. But the minimum investment size is £100,000. That might seem a dealbreaker – or even proof it’s for institutions only – except that sometimes factsheets quote high minimums but the figures turn out not to apply to retail investors. (I still have hope.)

Here’s the skinny on this short duration index-linked gilt fund, as of my writing:

Source: iShares

Don’t be concerned at the fund’s low number of holdings. Not from a riskiness perspective, anyway.

As the UK government stands behind all gilts, they are all assumed to have the same credit risk – extremely near-zero, because it’s assumed the UK government will never default. Hence you don’t need to diversify gilts like you would individual corporate bonds or equities.

The fund is very new as I say, so we don’t have long-term data. But iShares is a top-tier fund house and we can assume this fund will behave just as you’d expect shorter-term index-linked gilts to act, minus a small drag from fees.

One of these funds is not like the other one

iShares awards its new linker fund a ‘3’ risk level. The risk scale runs from one to seven, where low is less risky.

Its conventional index-linked fund2 – which has a duration of over 18 – has a risk level of ‘6’.

Six is bigger than three. And so again, I don’t see why the short duration index-linked gilt fund shouldn’t be available to common folk like us.

The following graph shows how this lower risk playing out in practice.

The blue line charts the return of the iShares shorter duration linker fund since its launch in June. In yellow we have iShares’ standard longer-duration index-linked fund. Both funds are accumulation class

Note which one gave you the smoother (less risky) ride:

Source: Hargreaves Lansdown

Between October and December 2023, hopes rose that the rapid cooling of inflation would soon lead to much lower interest rates. But as 2024 has developed, markets have tempered their expectations due to somewhat sticky core inflation, especially in the US.

The graph shows how the longer duration linker fund reflects these changes in sentiment. Its value moves roughly 15% between the October 2023 trough to peak rate cut optimism in December. Its returns over this period are not driven much by inflation. Rather the move reflects changing interest rates.

In contrast, the iShares ‘Up To 10 Years’ linker fund is a sedate affair. Its much lower duration means it’s far less affected by changing interest rates.

Note you’re not getting something for nothing here. The real yields on shorter index-linked gilts are much lower than on longer-dated issues – less than 0.25% for linkers with less than five years to run versus a real yield of over 1% if you go 20 years out, according to TradeWeb.

It’s not that one fund is ‘better’ per se than the other fund.

It’s that they are doing different things.

What’s the alternative?

Now we know why owning a short duration index-linked gilt fund could be appealing. But what can we do instead of buying it – since for now it seems we can’t?

Create your own short duration index-linked gilt fund via a linker ladder. Basically DIY your fund but only from shorter duration index-linked gilts up to ten years. We’ve written about how to create a linker ladder [for members]. You can expect a lower yield than with a longer-duration ladder, but less volatility.

Buy a longer duration index-linked gilt fund anyway. As I’ve said, the duration on the standard iShares’ ETF (ticker: INXG) has come down to just below 16. That’s still pretty wild if interest rates move. But (a) it’s lower than it was and (b) interest rates seem more likely to come down than to rise, so it could work in your favour as lower rates would push its price up. Crucially, real yields for index-linked gilts are positive right along the curve now. You’re not being charged a negative return for inflation protection like in 2021.

Invest in a lower duration global inflation linked bond fund that’s hedged back to UK pounds. As noted, this is what The Accumulator did with the Slow & Steady portfolio. Global inflation should roughly proxy UK inflation – though over the short-term especially they could diverge. Hedging protects you from currency risk and lowers volatility, but note currency moves are also a mechanism that corrects for inflation differentials. Which means there are scenarios where you might wish you owned such bonds unhedged.

Buy some US Treasury Inflation Protected Securities. I own a slug of the iShares US TIPS ETF (ticker: ITPS). It’s cheap and the duration is just under 7. My bond allocation is modest and only really there for some peace of mind in a crisis, so I’m happy with (unhedged) US dollar exposure. Often – but not always – the US dollar does well when markets crash.

Increase your cash allocation. I believe cash is the king of asset classes. However it tends to get a bad rap in investment circles. You won’t retire early or rich if you only hold only cash. Strategically though, a chunky allocation to cash provides many benefits, from dampening volatility to dry powder for investing into sexier stuff during a bear market. You can think of cash as a short-term bond with a duration of zero. Allocating to cash therefore pulls down your overall average fixed income duration. Cash earning a decent interest rate can also help you with (imperfect) inflation hedging. You noticed how interest rates rose as inflation spiked over the past two years? Not by enough to match the worst of it, but enough to keep the lights on. (Obviously I’m talking about milder inflationary bursts here, not actual hyperinflation.)

This short duration linker fund should be available to us

When you consider all the bonkers stuff you can buy on your broker’s platform, there is no good reason for this particular fund not to be available to private investors.

I mean, two years ago ‘bonkers stuff’ included a long duration index-linked ETF from iShares that at that time was primed to crash 50% in a year when interest rates rose.

Such interest rate risk is massively lower with iShares’ short duration index-linked gilt fund. True we can also expect a lower return – because its holdings are on lower real yields – but that isn’t a risk, it’s pricing.

Who knows. Perhaps I’ll press ‘Publish’ on this post and immediately receive news from my broker that it has made the fund available. I’ll drop a note into Weekend Reading if so. Subscribe to ensure you get it!

Until then we can only dream of owning such easygoing inflation protection.

(As well as asking ourselves some serious questions about when and why we began dreaming about funds, and whether it’s entirely healthy…)

1. Yield to maturity. You can think of it like the interest rate you’ll get provided you hold the bond to maturity. [↩]
2. Not its longer duration ETF I mentioned earlier, though they’re very similar. [↩]

What caught my eye this week.

Hard to believe it’s more than ten years ago that I wrote – slightly tongue-in-cheek – about how I was betting against Neil Woodford.

The then-lauded fund manager had just handed back the reins of the Edinburgh Investment Trust – one of several funds he ran as Invesco’s superstar manager – because he was opening his own fund shop.

Edinburgh’s share price fell from a 5% premium to trade at a discount to NAV in response.

But I reasoned:

Sure, a few [other] income investment trusts are on a discount, but my point is it’s clearly possible to run an income trust and be well-regarded enough for investors to pay more for shares in your trust than the value of its assets, even if your name is not ‘Neil Woodford’.

And my bet – and the reason I bought the shares after the sell-off – is I believe the same will likely be true of the Edinburgh trust at some time in the future.

In fact, I wouldn’t be surprised if the premium even comes back before Woodford has left in April!

Okay, it took until August – but I was right and it was a nice little trade.

However I kind of missed the wood for the trees.

Woodford’s stock

Most readers will know Woodford’s new venture went on to collapse within just a few years. It left a trail of broken-hearted followers in its wake. As well as a legal kerfuffle that was still dragging on this year.

Here’s a podcast recap from A Long Time In Finance. Or take your pick of two books written about Woodford’s rise and fall.

I can’t say I predicted this disaster in my 2013 piece. Although to be fair, who honestly could have?

The scale of the drama, anyway.

Me, I even admitted I thought Woodford had as good a claim as any to investing edge.

Although thankfully – and more on-brand – I said we couldn’t be sure. Even 25 years of outperformance at Invesco – which had made him the darling of middle-England savers – wasn’t definitive evidence of skill versus luck.

Also, I wrote:

I don’t think you should spend your time looking for the next Woodford though, any more than I think you should bet your two-year old grandson is going to be the next David Beckham.

Some scant few of us are touched by the gods of fortune, but you surely don’t want to gamble your retirement on it.

That second line is pretty portentous in light of what happened next.

Hey brother, can you spare a follow?

One person who is definitely not looking for the next Neil Woodford is… Neil Woodford.

Because the fund manager this week relaunched himself as a financial influencer.

Writing on his new blog, Woodford says:

My name is Neil Woodford. I am 64 years old, and I live in southwest England. I have worked in the investment industry since the early 1980s. You may remember me as the fund manager who avoided the dot-com bubble and the banking crisis and delivered index-beating performance for over 25 years, or perhaps as the ‘disgraced’ fund manager who presided over Woodford Investment Management’s collapse in 2019. Others may not have heard of me at all. Whatever your perspective, you may be curious about what I have to say about a wide range of economic, social, and political issues that impact our everyday lives.

Unfortunately, much of the commentary I read about the UK economy is long on opinion but critically short on data. It is often factually wrong, perhaps because established narratives are too willingly accepted. What is clearly severely lacking is data-supported information and analysis.

The economic analysis and commentary in Woodford Views will focus on relevant facts and data without censorship from editors, pressure to toe a particular line or consensus thinking.

Well you’ve gotta admit the lad’s still got chutzpah coming out the Wazoo. There’s even a dose of 2024-style post-truth anti-mainstream posturing in there.

Only 93 followers so far on Instagram though. The struggle is real.

Glass fund houses

We can surely guess how those who’ve pursued Woodford in the courts feel about this development. Or those who lost money with his funds. Or, worse, who waited for years just to get their money back.

Me? I’m a complicated soul.

While it’s abundantly clear in hindsight that Woodford’s mixing of private and public assets was ill-advised in open-ended vehicles, it’s not like that hadn’t been done before. It still goes on today.

He was criticised too for loading up on unlisted holdings with his closed-end Patient Capital trust. But many investment trusts are languishing on discounts today in part likely because of their illiquid private assets, including giants such as Scottish Mortgage and RIT Capital Partners.

And while it’s now far harder to make the case for Woodford’ stock picking prowess in light of the disastrous run at his second venture, there is probably even another universe where economic circumstances turned differently and his contrarian bets were rewarded.

Not need to type angry comments at me! I know he earned millions selling himself as someone who could avoid such landmines but was ultimately paid for failure, given this disastrous outcome:

Source: Guardian

I’m just saying it’s a truism we only live through one reality but many other things could have happened.

If you like fund managers when they outperform, then you must at least acknowledge that such outperformance was possible because they – and you – took a risk that things would turn out far worse.

Sympathy for the devil

Even the likes of Buffett could have been wiped out in an alternative universe where, say, the US went to war with Russia in the mid-20th Century, or if his legal troubles of the early 1970s hadn’t been amicably resolved, or if a couple of key decisions during the Salomon Brothers scandal of the late 1980s had gone differently. And nobody’s track record is as a good as Buffett’s.

So yes, I too have read the stories of hubris and yes-man-ning in the Woodford Investment Management days. It all seems very off. I also agree it was ill-advised for him to go investing in blue sky nano-caps after making his bones – and his brand – as a large-cap fund manager.

But I can’t quite bring myself to write an apoplectic and hyperbolic op-ed about Neil Woodford the ‘finfluencer’ that would easily write itself.

(My co-blogger in contrast would surely have a field day.)

I don’t know, perhaps I think everybody deserves at least a chance of redemption.

I also recognise someone who can’t let go of a love of markets and the game. A fellow sufferer, perhaps?

Maybe it’s just the sheer brass balls of the man refusing to go quietly.

Or perhaps I pity anyone trying to make money from a new blog these days.

Why go there?

To be crystal clear, I understand anyone who splutters angrily at Woodford’s new venture. It’s almost surreal.

And I obviously don’t think anybody needs to invest money with Woodford or any other star manager.

Invest via a global tracker fund – or some other passive index funds – and you’ll never face being embroiled in fund manager drama ever again.

Have a great weekend!

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