What caught my eye this week.

It’s not been easy to find reasons to be optimistic about the shrinking British stock market in recent years.

But I think how private investors, fund managers, the investment trust industry, and investment platforms worked together to defeat US firm Saba’s designs on the trust sector might qualify.

As I wrote last month, there was something of a last alliance vibe about this coalition of the unwilling.

But so comprehensively was Saba defeated – it lost all seven showdowns, and on large turnouts of private investors who overwhelmingly voted no – that the result was quite heartening.

This was shareholder democracy in action, and I’m all for it.

Moreover the platforms showed that they can facilitate such a democracy if called upon.

Your vote counted

In the early days of Monevator, lots of readers urged me to write articles about the evils of nominee share ownership and the demise of paper share certificates.

I saw their point. But I also saw the changes as inevitable and not the most important battle to win compared to, say, lowering fees or spreading knowledge about index fund investing.

Anyway such appeals stopped long ago, whether because the proponents accepted the change or because they moved on to a realm where their voice was even less influential than here on this mortal coil.

But wherever they are, I hope they’re heartened too.

Nominee ownership and representation via electronic voting on platforms does not inevitably mean disenfranchisement, or to be kicked around by those with the billions and the biggest boots.

And that is good news, whether or not you agreed with Saba’s charges and proposals. (Personally I share some of his complaints. But I was not persuaded by the remedy he was offering.)

He gets knocked down, but he gets up again

Saba is now going after a new quartet of trusts, suggesting they be turned into open-ended funds.

Curiously, Moguls-featured Pershing Square isn’t on the list despite its yawning discount.

Anyway, we’ll have to whether Saba’s relentlessness eventually exhausts the opposition.

More UK investors are apparently getting in on the act too. For example, the hugely talented Christopher Mills is said to be raising money for a trust that will work to close discounts at rivals.

As somebody who sees rife opportunity in the trust sector, I’m not surprised.

Though ironically two Mills-affiliated investment trusts themselves sit on 25-30% discounts…

Passive engagement

I’ll leave more comment in that direction for our Moguls member posts though.

Indeed for most Monevator readers who sensibly invest in index funds, this might all seem a bit irrelevant.

But I’d suggest it’s very relevant.

As index funds take up an ever-larger share of the overall investing pie, it’s really important that cheap and effective investing for the masses doesn’t become a lazy synonym for disenfranchised investors and the fracturing of shareholder democracy.

That charge has already being made as index funds have grown to dominate the investing landscape. For example, from the New Statesman:

The upshot of this mix is an ownership regime with a chief interest in maximising assets – whether by minimising costs to take market share, or by promoting general asset price inflation – and takes little interest both in how capital is allocated and how any company within its diversified portfolio is governed.

In other words, such an ownership regime takes no ethical stance on what those companies produce, how they are run, what they sell or what impact they have on the planet.

It’s a valid concern.

Squint though and you can see this battle with Saba as upholding the thin end of the same wedge that ends with Vanguard cutting fees further in the US recently.

The common thread is what’s ultimately in the long-term interests of ordinary shareholders.

Perhaps there’s even a future where even index fund investors get to vote their wishes somehow on the vast range of issues raising by the firms their tracker funds hold – albeit perhaps by aggregating their general wishes at the fund manager level?

Time will tell. But I’m more hopeful about that sort of thing than I was two months ago.

Have a great weekend.

p.s. Two corrections! We featured a wonky graphic in the email of TA’s linker piece on Tuesday. Thanks to reader Richard for the heads-up, and see the corrected post for the right graph. Then the next day TA achieved a – very rare for him – double by misstating the age you can open a cash ISA. You must be 18, of course. Sorry cash-loving youngsters! And cheers to reader Tommo for spotting what I missed.

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The failure of index-linked bond funds to perform post-Covid has really been bothering me. What’s the point of these things if they don’t actually protect you from inflation? Meanwhile, individual index-linked gilts – correctly used – are meant to be a proper inflation hedge. But is that true?

Can we empirically prove individual linkers ¹ worked when inflation let rip?

First, some context. Our favoured linker fund holding at House Monevator prior to the post-pandemic price surge was a short-duration model. That’s because short-duration index-linked fund returns are more likely to reflect their bonds’ inflation ratchets, and are less prone to price convulsions triggered by rocketing interest rates.

Longer duration linker funds, meanwhile, got hammered in 2022 because they’re more vulnerable to rising interest rates. When rates soared, prices dropped so hard and fast that their bond’s inflation-adjustment element was rendered as effective as wellies in a tsunami.

Hopefully you at least avoided that fate…

The weakest link(ers)

So it’s October 2021, and you’re duly positioned on the coastline, scanning the horizon for inflation, with ample resources invested in short-duration linker bond fund units.

Here’s how our defences performed once the inflation Kaiju was unleashed:

Inflation versus short-duration linker fund

Index-linked bond fund is the GISG ETF. Data from JustETF and ONS. February 2025. NB. The linker fund trend line was corrected on 18 Feb 2025.

Oh. As that calm-voiced announcer-of-doom on Grandstand might have intoned: “Inflation One, Passive Investing Defence Force, Nil.”

Or, in numbers more appropriate to an investing article, the annualised returns from October 2021 (when inflation lifted off) to year-end 2024 are:

• UK CPI inflation: 5.9%
• Short-duration linker fund: 0.6%

Note: all returns in this article are nominal, dividends reinvested.

In other words, this linker fund fell far behind rising inflation and posted real-terms losses over the period.

Right-ho. So that was a learning curve.

Since then I’ve put a lot of time into researching individual index-linked gilts, commodities, gold and money market funds – all assets fancied as offering some degree of inflation protection.

The most reliable should be individual index-linked gilts. After all, they come with UK inflation-suppression built-in. Put your cash in, and it pops out at maturity, with a price-adjusted enamel on top. Purchasing power protected!

All you must do is not sell your linkers before maturity. Buying-and-holding prevents the kind of losses bond funds are vulnerable to realising. Funds’ constant duration mandates make them forced sellers when bond prices are down.

Excelente! But one thing was still nagging me. Did individual linkers actually deliver on their inflation-hedging promise during the recent price spiral?

Inflation versus individual index-linked gilts

To answer that question, I simulated the performance of a small portfolio of individual index-linked gilts using price and dividend data from October 2021 to year-end 2024.

Then I pitted the individual linkers against CPI inflation and GISG, the short-duration linker ETF discussed above.

Here’s the chart:

Data from JustETF, Tradeweb and ONS. February 2025. NB. The linker fund trend line was corrected on 18 Feb 2025.

Okay, the individual linkers (pink line) did better than the fund but they still lagged inflation. The annualised return numbers are:

• Inflation: 5.9%
• Individual linkers: 4.1%
• Linker fund: 0.6%

That’s still an unhealthy gap as far as I’m concerned – like buying a peep-hole bulletproof vest.

Proving a negative

Why did the individual index-linked gilts lose money versus inflation?

Because way back in 2021 they were saddled with negative yields. That is, the buy-in price for linkers was so high that their remaining cashflows were guaranteed to sock you with a loss, if you held them until maturity.

The best a linker portfolio held to maturity could do was limit the damage against inflation. But that negative yield drag meant it was always going to underperform.

But that’s a historical problem. Today index-linked gilts are priced on positive yields, so they can keep pace with inflation while sweetening the deal with real-return chocolate sprinkles on top.

The other point worth making is that my clutch of individual linkers were still susceptible to the downward price lurches that afflicted constant-duration bond funds.

The chart above shows a big dip in late 2022 when prices fell as interest rates took a hike, for instance. Think Trussonomics and other traumas of the era.

These are only paper losses to the individual linker investor who holds until maturity or death. Hold fast and eventually your bond’s price will return to meet its face value on redemption day (plus inflation-matching bonus in the case of linkers.)

Meanwhile, the bond fund is flogging off its securities all the time – profiting when prices rise and losing when they fall. That was a very bad design feature during the post-pandemic inflation shock.

My individual linkers’ price dip was smaller than the fund’s largely because I could choose to populate my modelled portfolio with shorter-duration bonds. Short bonds are less affected by interest rate gyrations, as discussed.

Still, I wondered if I was being unfair to the fund. After all, linker funds previously gained in 2020 as money flooded into the asset class.

One last chance for the linker fund

The next chart shows annual returns including 2020, the year before inflation ran hot.

Index-linked bond fund is Royal London Short Duration Global Index Linked M – GBP hedged. ² Data from Royal London, Tradeweb and ONS. February 2025.

Yep, 2020 was a good year for the linker fund. Interest rates fell and its price rose giving it a healthy lead over inflation, and the individual linkers. (Remember the fund profits by selling bonds as prices rise. Meanwhile, the longer average duration of the fund’s holdings meant that it enjoyed a stronger bounce versus my battery of gilts.)

There’s not much to see in 2021 – bar inflation engorging itself – but 2022 is the fund’s annus horribilis. It’s down 5.4% at face value and 16% in real terms. (Horrifyingly, the long-duration UK linker ETF, INXG, was down 45% in real terms that same year.)

Overall, incorporating 2020 does improve the linker fund’s showing. The annualised returns for the five year period 2020 – 2024 are:

• Inflation: 4.6%
• Individual linkers: 3.7%
• Linker fund: 2.2%

It’s still not enough. In my view, the best linker funds available were a fail when inflation actually came calling. I personally held both GISG and the Royal London fund at the time and became deeply disillusioned with them.

All change

The issue driving all this drama was that as inflation accelerated, investors demanded a higher real yield for holding bonds.

The average yield of the simulated linker portfolio above was -4.2% in October 2021. It had risen to 0.5% by December 2024.

When bond yields go up, prices go down. And that exposes the fatal flaw in linker fund design from an inflation-hedger’s perspective – the available products are always selling and even the short duration versions aren’t short enough.

Perhaps yields won’t surge as violently in a future inflationary episode.

But I don’t see why I’d take the risk when I can now buy individual index-linked gilts on positive real yields, hold them to maturity, and neutralise that problem. Individual linkers aren’t going to be slow-punctured by negative yields from here.

So I’ve ditched my index-linked bond funds. They were better against inflation than the equivalent nominal bond funds. But that’s not saying much.

There are other places to store your money so I’ll extend this comparison to the most interesting and accessible of those alternative assets in the next post.

Take it steady,

The Accumulator

Bonus appendix

If you’re interested in buying individual index-linked gilts then these pieces will help:

• Should you build an index-linked gilt ladder
• How to buy index-linked gilts
• Index-linked gilts: how to price, value, and track them in your portfolio
• How to build an index-linked gilt ladder

Are individual linkers better than linker funds?

At hedging inflation yes. At being more profitable, no.

For the avoidance of doubt, I’m not saying that a portfolio of individual index-linked bonds can magick up more return than a bond fund containing precisely the same securities.

What I am saying is that the individual linker portfolio is the superior inflation hedge when each bond is held to maturity. The design of constant maturity bond funds mitigates against matching inflation in the short-term, but should provide a similar overall return in the long run.

If you don’t care about hedging inflation then there’s nothing to gain by swapping your bond funds for a rolling linker ladder.

Fixed duration index-linked gilt funds could also hedge inflation effectively, but they don’t exist.

UK inflation versus globalised inflation

It’s worth mentioning that individual index-linked gilts are linked to UK RPI inflation (switching to CPIH in 2030). RPI was higher than CPI during the period so that’s helped my simulated portfolio claw back some ground against CPI.

By contrast, the short-duration linker ETF, GISG, currently allocates 14% of its portfolio to index-linked gilts. The rest is composed of other developed market, CPI-linked, government bonds: 56% US, 10% France, 7% Italy and so on. The point being that these other linkers don’t protect against UK inflation, though they do match related measures i.e. inflation in highly interconnected, peer economies.

As it was, inflation in these other countries was typically less than the UK’s post-pandemic. I haven’t attempted to calculate what difference this made but I think it’s another reason to favour an index-linked gilt investment product when you can get it.

Individual linker portfolio simulation

I didn’t want to bog the main piece down with a wander through the weeds (well, more than I already have) but for the record I’ll now show my workings.

The individual linker portfolio was constructed from three index-linked gilts, TIDM codes: T22, TR24, and TR26. Each gilt matures in the year indicated by the numbers in the code.

When each gilt matures, the redemption payment is reinvested into the next shortest gilt. For example, T22 is reinvested into TR24. I did not include trading costs for reinvesting dividends or redemption monies.

Relatedly, the performance figures for GISG and the Royal London fund are slightly affected by their OCFs of 0.2% and 0.27% respectively. But I don’t think these charges made a meaningful difference to the comparison over such a short time-period. The differential is too big to be explained by fund fees.

1. Index-linked bonds are colloquially known as ‘linkers’.[↩]
2. Full year data wasn’t available for GISG in 2020 or 2021 as it launched April 2021. However, only annual data is available for the Royal London fund.[↩]

What caught my eye this week.

Has winter dragged on for you too, or is it just me? I asked ChatGPT if the weather has been unusually cold and it waffled on for a bit with some anecdotes and then said I should check with the BBC.

Which seemed pretty unhelpful, but then I thought it’s also scarily similar to what you’d actually hear if you asked your nearest mate.

Anyway it has been especially chilly for the past few days. January saw the UK’s coldest night since 2015. Meanwhile on renewable energy investor forums I see debates about whether the slowdown in the North Atlantic conveyor has caused the wind to not blow as much as was forecasted. Which could explain why I’ve worn gloves every day since November.

But I also know I’m prone to Seasonally Affected Depression.

Every January I think I’ve dodged it and then it kicks in – well, about now – and I find myself reading articles about emigrating to Australia.

And yet crazed with cold fever I also ran these numbers on living on a canal boat. A definite case of jumping out of the refrigerator and into the icebox.

Chill brains

A big problem with emotions is how they skew judgement.

For instance I just saw this story about the Met police objecting to a new jazz club in Covent Garden on the grounds that drunk patrons might get mugged on the way home. It seemed ridiculous and I despaired at what London has become since I first arrived in the early-1990s.

But actually…safer is one thing it has become. So am I properly weighting that as I read the story against what mostly appears to me to be the enfeebling of London’s citizens and its nightlife?

Politics is where this emotional distortion effect looms largest.

Perhaps you’ve read in my previous Weekend Reading links how someone’s perceptions instantly reverse in the US depending on whether their favoured candidate is in the White House? So far-reaching is Trump’s chaos theory politics that I don’t doubt it’s affecting me too.

Then again there’s enough to be dispirited about closer to home.

Not least that despite demonstrably hobbling the UK economy – to the tune of £1,750 per person, annually – with his economically insensible Brexit, Nigel Farage is back and doling out his sounds-about-right slop to the same credulous faction who fell for it last time.

We’re told his resurgent Reform party could even dethrone the Conservatives.

Who knows? Though nobody could do a better job of unseating the Tory party than the Tory party managed over the past decade.

The Reform party this week said it would tax renewable energy, reflecting the party leadership’s long history of climate denial. Soon British policy could be driven by the motiviations of an angry middle-aged man in a near-empty pub on a Wednesday afternoon shouting at the television in the corner.

Elsewhere The Atlantic is reflecting on how Covid deniers won – politically, not scientifically – and Politico listed the 37 ways the supposedly disavowed ‘Project 2025’ has already shown up in Trump’s executive orders.

It’s depressing.

Cold comfort

But maybe you’re depressed about me bringing politics to your otherwise favourite financial resource?

Well I have some sympathy, believe it or not.

Over the past six months I’ve grown increasingly irritated at how one of my favourite small-cap share pundits has spent years bemoaning British doomsters as unpatriotic while he dismisses the idea that Brexit had any impact on the UK economy – even as he repeatedly sees an economic recovery around the corner and then is mystified when we instead limp along in semi-stagflation.

Stick to shares, I mutter – obviously in large part because I disagree with him.

Perhaps as you did with me above.

Naturally I think I’m even-handed. For example I flagged up the failings I saw in Rachel Reeves’ budget.

But then I would think that, wouldn’t I?

We all believe we’re above-average drivers.

The big political currents underway seem too important to avoid any mention of on my own website, even if only from a narrow financial perspective – which I do mostly try to stick to. It’s a highfalutin thing to say, but it almost feels irresponsible to look the other way when I have a platform.

Yet I really can see the sense in Jaren Dillan’s perspective at We’re Gonna Get Those Bastards, when he argues it’s okay to ignore politics:

Do you want to be right, or do you want to be happy?

Let’s say you choose the former. Good luck? Maybe get back to me in four years with a list of what you actually accomplished.

Yes, I am suggesting that we are all impotent. Yes, I am suggesting that one person can’t make a difference. Yes, I am just that cynical.

But deep down—do you disagree with me? Do you think that your rage-posting on social media is going to make a difference? Not only will it not make a difference, it is counterproductive, because, chances are, you’re turning people off in the process.

I know he’s probably right. Who has changed their mind about Brexit, despite its non-existent achievements? The polls have mostly turned against it only because so many of its supporters have died.

Oh well, at least my portfolio is up nicely so far in 2025.

And we’re inching towards spring…surely?

Have a great weekend!

p.s. ​Moguls​: I didn’t get a chance to send out the Monevator merchandise email this week – so don’t worry, you haven’t missed out on the fashion event of the century. The next two to three days for sure!

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