Hi,

Pension Funds seem to be collapsing to nothing at present. Most are now on -ve returns for the year. The ones that do stand out are the Index Linked Funds investing in Govmt stocks linked to the RPI. I have presumed as this is ever increasing, it will offer a good return in the short to mid term.

Am I right ?


What does the future look like for the Index Linked Fund NGP & FP/BGI UK Index-Linked Gilt Index from Friends Provident ???

Thanks

"Pension Funds seem to be collapsing to nothing at present. Most are now on -ve returns for the year."


How long until you retire?

Would you lend money to this man?
Gordon Brown is probably the last person you’d want to lend money toCooper on cash
With the government’s reputation for competence at record lows following the Northern Rock debacle, last week’s damning report into the regulation of Equitable Life and now the Treasury’s attempts to rewrite the fiscal rules, Gordon Brown is probably the last person you’d want to lend money to.

It would have been one of the best, and indeed the safest, ways to make money over the past year, though. While UK equity funds have dived 9.8% over 12 months and equity-income funds, usually a safe haven, have fared even worse with a 13.7% decline, the normally less-than-exciting index-linked gilt sector has returned an average of 12%.

There’s a reason why you don’t hear much about index-linked gilts: returns are steady but rarely shoot the lights out. With inflation soaring, however, they are enjoying their time in the sun.

Four out of the top ten funds in June were in the sector, with the best, the Scottish Widows UK Index Linked tracker, up a stellar 3.22% in just one month.

When you invest in an index-linked gilt, as with a standard gilt, you are in effect lending money to the government. It pays you a fixed amount of interest in return and unless the government goes bust you get your money back at the end of a term.

The beauty of index-linked gilts is that the value of your capital and your interest goes up in line with inflation.

That’s a big bonus with the soaring cost of food and fuel sending prices ever higher. Inflation jumped to 3.8% in June, up from 3.3% the previous month and an 11-month high. And that was just on the government’s preferred consumer prices index.

If you look at the more representative retail prices index, which includes housing costs and on which index-linked gilts are based, the cost of living is 4.6% higher than a year ago, up from 4.3% in May.

It’s no coincidence, then, that Fidelity, one of Britain’s biggest fund managers, chose last week to tell me about its new Global Inflation-Linked Bond fund. The scheme will invest in a portfolio of index-linked government bonds from America, Japan and Europe as well as the UK.

Barclays Capital, the investment banking arm of the high-street bank, has also got in on the act by extending its range of inflation-linked exchange-traded funds — investments that follow an index but can be traded like shares. Even sleepy National Savings & Investments (NS&I) has realised it has a winner on its hands with its index-linked savings certificates, which it is promoting with a big advertising campaign.

The three- and five-year certificates pay the retail prices index plus a fixed return of 1% a year — or 5.6% following last week’s spike in RPI. Returns are tax-free, so that’s the equivalent of 9.33% if you’re a higher-rate taxpayer and 7% if you are in the basic-rate band.

If inflation spikes to 5% by the end of the year, as many City analysts think possible, NS&I will be paying 6% — or 10% gross for a higher-rate taxpayer. You’re not getting returns like that anywhere else — especially not when you consider that NS&I is pretty much the safest investment going.

Sadly this could be as good as it gets. George Buckley, economist at investment bank Deutsche, thinks inflation will be back down at an average of 3% by next summer and 2.3% — pretty near the Bank of England’s target — by the autumn of next year.

It doesn’t bode well that the Debt Management Office, the agency that issues gilts, recently auctioned off a tranche of 30-year index-linked bonds and it was only 1.1 times oversubscribed — a pretty poor result by all accounts.

Pension funds have been huge buyers of long-tern gilts because they perfectly match their liabilities, but it seems this interest is waning.

Even the manager of Fidelity’s new fund admits that returns from UK index-linked gilts may be near a peak, which is why he is looking to America, Japan and even Mexico, where he thinks inflation is more entrenched.

In Britain, the spike in the cost of living is almost all down to energy and food — core inflation, which strips these out, is at just 1.6%. And last week’s drop in the price of oil to $129, down from a peak of $147 earlier in the month, suggests the spike could be short-lived.

I’ve been caught out by crude before — I thought it had peaked in May when it went above $120 — and few City analysts would bet against it going higher again. If America and Britain are really heading for recession, though, the lion’s share of the inflation spike should be behind us.

Fidelity manager Andy Weir said index-linked gilts were currently pricing in inflation of 3.55% for the next 10 years. If you have every confidence that the Bank of England will bring it back down to its 2% target — or 2.75% on the retail prices index — gilts are extremely overpriced. If you have no confidence in the Bank governor Mervyn King, snap them up.

I’m in the former camp — however much he needs it, Gordon Brown won’t be getting his hands on my money

I’d rather profit from inflation in emerging markets, where food and fuel are a much bigger part of the inflation basket. About 50 countries, almost all in emerging markets, have inflation rates above 10%. Not all of them have inflation-linked bonds, but Mexico is one of the few that does. With inflation expectations not much higher than here, it has to be a better way to profit.

Kathryn Cooper is editor of the Money section

Many thanks Ash. Might be worth a gamble after all then...