Gilts – What Are They?

The simple answer to that opening question is that they are bonds issued by a government and then a payout is passed on to the purchaser every six months. The gilts available have been issued by the national Banks of England, Ireland and South Africa. Traditionally though when a fund manager refers to gilts, it’s the Bank of England that they are talking about. Most of the gilt securities are held in pension funds and insurance packages, and are managed by fund managers who have the experience of handling investments on behalf of clients. The gilts are less risky than other investments but obviously being more secure does not attract the high interest rates, and even if there is a boom in the economy, then the gilt security remains the same. Equally if there’s a downturn, then the gilt security holder has the benefit of getting a payout regardless.

People often refer to them as gilt edged securities, and this doesn’t mean there’s some extra significance to that expression. It comes from the days when the bonds were issued with a gilded edge to the certificate – nothing more than that!

There are index linked gilts issued by the UK government which are adjusted according to the Retail price Index. This is the figure which is published every month by the Office for National Statistics (ONS) and is based on the household expenditure. Random selection of participants guarantees that ONS get a cross section of society, and their household expenditure is analysed to come up with the monthly RPI. This is the figure which relates to the percentage increase in inflation. All that impacts on the performance of their Gilts, and any index linked investment fund. The most recent and longest running British Government Gilt was issued in 2005 and will mature in 2055. The interest is guaranteed but at a very low rate so it’s a long steady investment which may be suitable for some.

Variations on Gilts

There are a few variations on the British Gilts with double date securities which have alternative maturity dates. . One such was the Exchange Gilt 2013-2017, but there are only a few of these on the market these days, partly because they gave a much better interest rate than the long term version. In the recent financial turmoil and as part of the quantative easing schedule in 2009 the Bank of England bought high volumes of its own gilt securities as a way of ‘steadying the ship’.

This action goes some way to showing how serious the problem was and highlights the frailties of a financial system beads on high risk. That could be the reason many ‘ordinary’ investors are becoming ever more cautious with their savings and pensions. The gilts are guaranteed and that is for some the peace of mind that they need. As people get nearer to retirement age, the last thing they want to do is gamble with their life savings – the government bond is no gamble, gilt edged or not.