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The Slow and Steady passive portfolio update: Q1 2019

The portfolio is up 7.65% year-to-date

Heresy! Prepare the stake and firelighters, for I am about to commit passive investing heresy most foul. I am going to invest part of our Slow & Steady portfolio into an active fund.

I can see the mob forming now. Loathing hangs in the air like smoke, torches spark, lips snarl, my mother turns her back.

But allow me to… explain.

We need inflation protection. When inflation runs amok, the only reliable guard is inflation-linked bonds. Yes, equities outpace inflation over the long term but they’re likely to be mauled when price rises get out of control. Witness the -74% smashing of UK equities from 1972 to 1975.

As for gold and commodities more broadly – neither are dependable allies.

No, it has to be inflation-linked bonds and I believe there’s an active fund that addresses the needs of the Slow & Steady portfolio better than any rival index tracker.

The answers to three questions explain my thinking:

  • When is it okay to choose an active fund?
  • What is it about this fund that makes it the chosen one?
  • What’s wrong with the competing index trackers?

Let’s go through these questions, and then you can burn me as a heretic and scare the children with my blackened bones.

My championing of passive investing and index trackers is not ideological. It’s pure pragmatism based on the overwhelming evidence that low-cost investments and strategic asset allocation win better results for investors (as a group) than high cost investments and market-timing techniques.

I’ll choose an active fund when:

  • It’s cheap.
  • Its purpose is aligned with my strategic asset allocation objectives.
  • It’s not a black box. In other words, its workings are reasonably well communicated, and the manager’s freedom of action is so constrained that I don’t have to worry they’ll be piling into palladium futures next week.
  • It serves my needs better than any equivalent index trackers.

I believe my chosen fund meets these tests.

What’s the active fund?

It’s the Royal London Short Duration Global Index-Linked Fund – hedged to the pound.

This fund mostly trades in the high-quality, low volatility, inflation-linked government bonds needed to protect the Slow and Steady portfolio from high and unexpected inflation.

It’s cheap at 0.25% OCF – the same price you’d expect to pay for a global government bond index tracker that’s hedged to the pound. It’s not as cheap as the Vanguard UK inflation-linked gilt fund it’s replacing in our model portfolio. But that fund and others like it have a major problem.

The problem with UK inflation-linked gilt funds of all stripes is that they harbour real interest rate risk. They’re like prime beef cows carrying a nasty brain disease you’d rather not take a chance on.

In summary:

  • UK inflation-linked gilt funds are dominated by long bonds.
  • Long bonds are likely to suffer most if real interest rates rise.
  • Real interest rates have been bouncing along the historical bottom since the Global Financial Crisis.
  • If rates rebound then the long bond vulnerability of inflation-linked gilt funds could drown out their anti-inflation benefit – and stiff you with significant losses.

The fix is a fund that invests in shorter duration inflation-linked bonds. This way you get inflation-protection with lower real interest rate risk. A short duration fund will still take a hit if interest rates rise, but it’s less sensitive because it quickly replaces low yielding bonds as they mature with higher yielding versions.

The only shortish inflation-linked UK gilt funds I can find come with eye-watering price tags because they must be bought through approved financial advisors.

In contrast the Royal London fund is reasonably priced, widely available, and its global inflation-linked bonds can stand in for gilts due to their high quality and returns that are hedged back to the pound.

The Royal London holdings have a short average duration of 5. This means the fund stands to lose 5% of its value in the face of a 1% interest rate rise – which compares well with a 21% loss for the Vanguard inflation-linked fund in the face of the same rate rise1.

The fund holds a diversified portfolio of bonds with credit ratings that are mostly as high or higher than UK equivalents.

Global inflation-linked bonds won’t precisely match UK inflation rates but the evidence suggests they’re reassuringly close and owning them adds a diversification benefit to boot. And more than 20% of the fund’s holdings are in UK bonds.

The Royal London fund has existed for over three years and stuck to its mission of investing mainly in global inflation-linked and UK bonds.

It can invest in conventional bonds, corporate bonds, and in fixed income instruments with a lower credit rating than enjoyed by the UK government. But Royal London publishes plenty of information so I can keep an eye on things and sell if the managers head off the map.

I’m comfortable that the fund fulfils the Slow & Steady’s anti-inflation asset allocation requirements now and in the probable future.

I’m not interested in the fund’s recent performance. This move is about building fit-for-purpose inflation-proofing into the portfolio; short-term results are irrelevant. I expect this allocation to hand us a slightly negative return in the years ahead, given how low bond yields are and the market’s low inflation expectations.

So I’ll keep our inflation-linked bond asset allocation at 5% for now, but build it up quite quickly to 50% (of the total fixed income allocation) as our time horizon ticks down.

With plenty of recovery time still on our portfolio clock, I think we’re currently better served by mostly holding conventional government bonds with greater powers to counterbalance equity losses during a recession.

Must you do this?

There is an index tracker alternative: the Legal & General Global Inflation Linked Bond Index Fund.

I could happily invest in this fund, too. The trade-offs are:

  • It’s an index tracker so there’s no need to worry about mission creep.
  • It’s less diversified because it’s ex-UK – so no UK bonds at all.
  • It’s a touch more expensive at 0.27% OCF.
  • Its duration of 8 carries slightly more interest rate risk. However, that duration still fits with our model portfolio’s remaining 12-year time horizon.

There isn’t a huge amount in it. If you’re uncomfortable with going over to the active side, and have a time horizon greater than eight years, then the L&G fund is worth researching. (Shout out to Monevator reader Mr Optimistic for reminding me of both these global linker funds in the comments to the last episode of the Slow & Steady portfolio).

Incidentally, the real interest rate risk embedded in the Vanguard inflation-linked fund hasn’t materialised in the four years we’ve held it. And it has performed creditably for us: 8.93% annualised return, which ranks fourth out of seven funds.

But the results aren’t the point. What matters is we can’t rely on it to play its part in our portfolio and we have better alternatives.

Using an active fund like this does not change our passive investing stance in my view. We’re not market-timing, we’re not choosing the fund because we think it’s hot. We haven’t abandoned our investment principles. We are simply using the best fund available to meet our long-term asset allocation needs and to protect ourselves from foreseeable risk.

Hot! Hot! Hot!

I don’t know if I’ve done enough to extinguish the purifying flames. Hopefully the wood bundles are being taken away and I’m welcome back to the fold as a black sheep rather than roast lamb.

Either way, the Slow & Steady Portfolio has had a smoking quarter. It’s recovered much of the ground lost between October and December, with our annualised return now clocking in at a healthy 9.15%. Check it out in EyeBurn Neuro-vision:


The Slow and Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £955 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts.

New transactions

So as mentioned ever so briefly above, we’re selling off our Vanguard UK Inflation-Linked Gilt Index Fund. We’ll replace it with the Royal London Short Duration Global Index-Linked Fund.

Every quarter we also contribute £955 in new cash that’s split between our seven funds according to our predetermined asset allocation. The Royal London fund therefore picks up the share of new cash allocated to inflation-linked bonds: £47.75 or 5%.

We rebalance using Larry Swedroe’s 5/25 rule but that hasn’t been activated this quarter, therefore our trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%

Fund identifier: GB00B3X7QG63

New purchase: £47.75

Buy 0.236 units @ £202.44

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%

Fund identifier: GB00B59G4Q73

New purchase: £353.35

Buy 1.007 units @ £350.93

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%

Fund identifier: IE00B3X1NT05

New purchase: £57.30

Buy 0.2 units @ £285.94

Target allocation: 6%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.26%

Fund identifier: GB00B84DY642

New purchase: £95.50

Buy 59.95 units @ £1.59

Target allocation: 10%

Global property

iShares Global Property Securities Equity Index Fund D – OCF 0.22%

Fund identifier: GB00B5BFJG71

New purchase: £57.30

Buy 25.963 units @ £2.21

Target allocation: 6%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%

Fund identifier: IE00B1S75374

New purchase: £296.05

Buy 1.744 units @ £169.72

Target allocation: 31%

UK index-linked gilts [Previous allocation, getting sold]

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%

Fund identifier: GB00B45Q9038

Sell all: £2185.46

Sell 10.964 units @ £199.34

Target allocation: 5%

Global index-linked bonds [Previous allocation, getting bought]

Royal London Short Duration Global Index-Linked Fund – OCF 0.25%

Fund identifier: GB00BD050F05

New purchase: £2233.21

Buy 2157.691 units @ £1.04

Target allocation: 5%

New investment = £955

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Cavendish Online. Take a look at our online broker table for other good platform options. Look at flat fee brokers if your ISA portfolio is worth substantially more than £25,000. The Slow & Steady portfolio is now worth £45,000 but the fee saving isn’t quite juicy enough for us to push the button on the move yet.

Average portfolio OCF = 0.18%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,

The Accumulator

  1. In principle, all things being equal, and all manner of extra caveats that could fill the internet. []
{ 67 comments… add one }
  • 1 Hemanth April 2, 2019, 12:17 pm

    Thanks for the update TA. I’ll leave the burning to the passive mob! 🙂

    Any thoughts on replacing the entire equity exposure with a single fund like Vanguard Global All Cap?

  • 2 Mark April 2, 2019, 1:17 pm

    I would agree with you IL bonds if it wasn’t the fact that they are only as good as the government set price index they are based on. As the government is both the lender and the setter of the terms regarding the inflation protection, it is unknown whether they would manipulate the index to make it not keep up with actual inflation. The truth is, these bonds have never been proven in a severe inflationary period such as the one we lived through in the 70s. Only gold has any sort of proven record long term through inflationary periods dating back thousands of years. It is not perfect but it is tried and tested. IL Bonds are not.

  • 3 Algernond April 2, 2019, 1:56 pm

    Hi Accumulator,

    I’m using Vanguard’s Short term Global bond fund hedged GBP (0.15% OCF) as a proxy for the IL portion in my portfolio.
    Is this a justifiable strategy?

  • 4 Nicholas Stone April 2, 2019, 2:52 pm

    Why not use IGIL? Global Inflation linked government bonds.

  • 5 The Investor April 2, 2019, 4:01 pm


    Hi! Per the factsheet, IGIL has a duration of just over 12:


    This compares with duration 5 for the Royal London fund.

    As @TA explained in his piece, he’s looking to lower duration. That’s the whole point. 🙂

  • 6 Nicholas Stone April 2, 2019, 4:03 pm

    Ooops! I didn’t read it carefully enough!

  • 7 Matthew April 2, 2019, 4:15 pm

    If its short dated, does it need to be inflation linked? Because inflation risk is more of a long term risk, and normal short bonds ought to be priced competitively to the inflation linked ones

  • 8 Tony April 2, 2019, 4:26 pm

    I have tried and failed to understand government bonds investing options. And thus far shied away given the doubts over recent years whether now is the time to invest in them. Although I do understand the purpose is not returns but to balance against equities investing risk. Question- the Lgen bond cited has 1.27% annualised performance over 5 years on the link. The article says there’s little to choose between that and the Vanguard one, yet that Vanguard the article says has 8.93% 5 year annualised. What am I missing? Do you mean the purpose of the respective funds, rather than their returns, is comparable. Thanks.

  • 9 The Accumulator April 2, 2019, 5:57 pm

    @ Hemanth – I prefer more emerging market and small cap exposure than available in the Vanguard Global All Cap. It’s a good choice though.

    @ Algernond & Matthew – Short conventional bonds aren’t inflation-resistant like linkers. For sure, they’re better than longer bonds but the scenario we’re talking about is high, unexpected inflation – that’s when linkers really come into their own. Everything else gets hurt in that scenario or doesn’t reliably work.

    @ Nicholas – I don’t think IGIL is hedged to the pound – thus unnecessary volatility through currency risk that isn’t ideal on the fixed income side.

    @ Tony – I was comparing the L&G fund with the Royal London fund, not Vanguard. Bear in mind at no point am I comparing recent past returns. I’m only interested in the strategic role of the funds because I can’t predict the future.

  • 10 The Rhino April 2, 2019, 6:07 pm

    I’ve also been doing the portfolio accounts!
    I ended up with 6.66% return for the (financial) year across everything and after all costs
    I’m slightly concerned as it is the sign of the devil.
    Anyway, roll on next year!

  • 11 MJCROSS April 2, 2019, 8:22 pm

    No quibbles with the ‘active’ component here… pragmatism trumps dogma every time in my book.
    I have met the same problem regarding short dated index-linked gilts, but as I’m trying to build a 100% ETF portfolio the L&G fund is sub-optimal… therefore I have been looking at the GBP hedged US short-dated options… e.g. iShares’ USD TIPS 0-5 GBP HDG (TI5G) and/or USD FR BOND UCITS HDG (FLOS). Not exactly correlated of course, but better than being burned at the stake (wink)

  • 12 Andrea April 2, 2019, 8:51 pm

    I tend to agree about the reasoning, but the data show that long term bonds tend to be less volatile than short term. While central banks can control short term interest rates, it’s harder for then to control long term.
    It looks improbable that in the current environment, central banks will raise the short term interests so to drive the long-term interests substantially higher.

  • 13 ZXSpectrum48k April 2, 2019, 9:14 pm

    “The Royal London holdings have a short average duration of 5. This means the fund stands to lose 5% of its value in the face of a 1% interest rate rise ….”

    Not really correct. The fund stands to lose 5% of its value in the face of a 1% rise in real bond yields. Interest rates and real bond yields on ILBs have a fairly unstable relationship. Apologies for being pedantic.

  • 14 MrOptimistic April 2, 2019, 9:48 pm

    To quote from Tim Hale,

    ‘An argument could be made for owning inflation-linked bonds that have a maturity of around five years or so as you then get a relatively low volatility with strong inflation-protection characteristics. If you own them directly and until they mature, you have the certainty that they will deliver inflation-protected capital and interest payments along the way. You can purchase index-linked gilts via most online brokerages if you are a DIY investor. Your other option is to own a fund or Exchange Traded Fund that invests in them. As you will see, passive products exist for both. The issue you face is that many products tend to replicate the entire market for index-linked gilts, with an average maturity of about twenty years and duration of sixteen years or so. That makes them very volatile. You may want to look at actively managed funds e.g. look at the Morningstar Global Inflation Linked hedged to Sterling category. Pragmatism over dogmatism on this one!’

    Thanks Tim, beers on me 🙂

  • 15 Ben April 2, 2019, 10:09 pm

    Great article. Royal London Short Duration Global Index-Linked Fund is not distributing so there’s crazy posteriorly if it’s not in your ISA. Plus up to 45% tax on the approx 2.5% yield.

    Any alternatives to TI5G for exchange traded products?

  • 16 The Accumulator April 3, 2019, 8:35 am

    @ Andrea – What data are you referring to? The mechanics of bonds and the historical returns show that long bonds are more volatile than short. Hence lower return for treasury bills than gilts – the greater the risk, the greater the reward, in principle.

    @ Ben – The fund is distributing. Also, why 45% tax? Where are you getting the 2.5% yield figure from?

  • 17 ben April 3, 2019, 9:11 am

    It’s an income share class but the factsheet states 0.00% distribution yield. Also boomberg lists the dividends as estimated to the underlying. But who knows. Since the dividend type is “income” the tax can be up to 45%.

  • 18 MJCROSS April 3, 2019, 9:28 am

    @ Ben – alongside TI5G you could take a look at FLOS, which I understand to be a GBP-hedged tracker of the Barclays U.S. Dollar Floating Rate Note < 5 Years Index; that covers "U.S. registered,dollar denominated bonds of non-U.S. corporations,governments and supranational entities".

  • 19 Paul April 3, 2019, 12:29 pm

    @ TA – You mention that you want more Emerging Market and Small Cap exposure so that’s why the Global All Cap isn’t for you, however digesting the region exposure of this fund, it’s 9.9% towards EM and has very decent % in SC, which is in line with your own %’s in your spreadsheet breakdown for both, the OCF is only 0.24%, compare this with the 0.38% your paying for the SC and 0.26% for EM, I think it comes more down to personal choice than a statistical one being honest 🙂

    @ Hemanth – this fund is an excellent choice, as a one stop shop for equity as per Lars Kroijer’s approach in choosing the broadest equity fund you can find, that’s cheap and region diverse, as of writing the fund holds circa 6,126 stocks!

  • 20 The Accumulator April 3, 2019, 2:12 pm

    @ Ben – Yes, I don’t know why the factsheet lists 0% yield but you can see from the factsheet the fund also makes bi-annual distributions. Click on the dividends tab here for more: https://www.trustnet.com/factsheets/o/jpbv/royal-london-short-duration-global-index-linked-m-inc

    Dividend income tax is lower than normal income tax. See: https://www.gov.uk/tax-on-dividends

    @ Paul – Like I say, I think Global All Cap is a good choice. If I was prioritising convenience then I would use it. As it is, my emphasise is on control and understanding the moving parts for two reasons:
    I enjoy investing!
    This is a model portfolio so it’s good to see how the pieces of the jigsaw fit together.

    Re: the stats – the Slow & Steady is 15% in emerging markets as a proportion of the equity allocation vs 10% for the All Cap. Must admit though, I thought the All Cap was lower in small cap than it seems to be now you’ve prompted me to take another look. The OCF comparison you make is misleading. The OCF for the Slow & Steady portfolio vs All Cap is 0.18% vs 0.24%. I get that figure by calculating the OCF by weight of the separate UK, Dev World, EM and Small Cap funds in the portfolio. I stripped out the bond and property funds and scaled up the Dev World fund so the asset mix was comparable to the All Cap.

    That’s not too shabby a cost saving for a bit more hassle.

    Still, I don’t think anything I’ve said trumps the convenience of having an all-in-one fund if that’s what matters most to you. I certainly wouldn’t go to all the trouble just to have an extra dollop in emerging markets.

  • 21 Hemanth April 3, 2019, 2:28 pm

    @Paul – That 10% EM allocation is over-weighted considering that the portfolio is 36% in bonds. But the 6% SC is roughly inline with FTSE AllCap’s SC weighting.
    I agree that the Vanguard All Cap fund is an excellent choice and recently replaced my 4-fund custom global tracker with it. No more re-balancing faff in my equity allocation. Now only if bonds were that simple. 🙂

  • 22 Paul April 3, 2019, 2:54 pm

    @Hemanth – good move on ditching the four funds for one 🙂

    Sharing my simple portfolio it’s:
    65% allocation to Global All Cap
    35% to Vanguard’s U.K. Long Duration Gilt Index Fund

    This matches my current risk and time horizon, the portfolio is held direct with Vanguard through an ISA account – 0.15% annual account fee.

    A great book is Lars Kroijer’s – Investing Demystified, the principles in the book is what I’ve based my own portfolio around, he goes into great detail on bonds in the book if you were looking for some ideas, Lars has done a few guest posts on Monevator, would deffo recommend checking them out 😉

  • 23 Dawn April 3, 2019, 3:11 pm

    Thanks monevator a very intresting read. food for thought. Ive reached FI .My fixed income is in cash! cash isa ,various savings bonds outside of isa. yes, its safe but im slowly loosing money. not quite getting interest to cover inflation!. my porfolio is 26% in cash, 43%in equities, 30% in rental property. Im only working partime and using the rental income. Im not touching equities or cash as yet . where can i put the cash part??? any suggestions anyone?

  • 24 old_eyes April 3, 2019, 4:25 pm

    Thanks for the suggestion of the Royal London Short Duration Global Index-Linked Fund. I read the earlier article and worried a bit about the risk of holding long duration index-linked bonds when interest rates rise, but I didn’t do anything about it. I looked around for an alternative with shorter duration and could not find one, so relaxed into the additional risk. I will definitely take a look at this one.

    On the active vs passive debate. I have always felt it was a continuum with funds as with individual investors. Presumably, with a low OCF and wide diversification of global bonds, it is sort of semi-passive. They can’t be flailing around madly churning holdings and keep the OCF that low. Unlike pregnancy, I think you can be a bit passive.

    I have also been totting up the performance of my portfolio over the financial year. If I have used the XIRR function correctly it comes out as 8.4% yield. I think I probably have got it right as I took out net 2% of the starting amount over the year for some house R&M, and ended up 6% up on my starting figure. Considering I was heavy on cash most of the year for the housing work and have a more defensive position than TA, it went well.

    Always a crash around the corner of course 🙂

  • 25 The Accumulator April 3, 2019, 5:37 pm

    Congratulations Dawn! Great to hear.

    Cash – the best you can do is put it into as many high interest accounts as you can, especially current accounts and regular savers. They’re all listed on Money Saving Expert. You can get decent rates by cycling a wedge through the various Regular Saver accounts but it’s hard work. It’s definitely worth considering whether some short linkers are right for you and whether you need as much as 26% in cash.

  • 26 ZXSpectrum48k April 3, 2019, 7:27 pm

    Can’t see this explicitly noted in the text but the RL fund is benchmarked against a composite index: 30% Barclays UK Govt ILB 1-10y; 70% World Govt ILB (ex UK) 1-10y (GBP hedged). So a 5% allocation is really 1.5% in GBP ILBs and 3.5% in Global ILBs assuming the manager doesn’t stray too much off index.

    This idea seems driven by a concern that a UK linker fund has too high a return volatility given it’s long duration and that real yields are at historic lows. Isn’t that an active view? Would you also reduce exposure to an equity index which also had too many high beta stocks and was at high valuations? And why wouldn’t you reduce duration risk to nominal gilts for the same reason as they are equally exposed to low real yields? It seems what you ideally want is inflation-linked cash deposits (that don’t exist) and instead you’re using this as as a proxy.

  • 27 David Henson April 3, 2019, 7:47 pm

    I’m really pleased to read this as I added this find to my portfolio about a year or so ago – basically for the same reasons outlined above and based on Tim Hale’s reasoning. It’s nice to have my own research backed up! And I can confirm the fund is definitely distributing!

  • 28 Ben April 3, 2019, 8:29 pm

    Income distributions from bond funds are taxed as income rather than dividend. This guy knows what he’s talking about:


  • 29 Fatbritabroad April 3, 2019, 9:39 pm

    The bit I’m not sure of is when to change my asset allocation.

    I’m only 38 so at present I’m 100% equities in my isa and pension. Fully realise and am comfortable that this can tank (and did a bit in December right after I invested an inheritance lol) with about 20% of my isa in p2p. I realise this isn’t ‘fixed’ income but for me at my age I’m happy to take some risk with this bit of my portfolio. I’m getting about 6.5% on this amount at present (about 22k) and am only adding new money to my equities. I’ve found bonds harder to understand than equities if I’m honest which they probably shouldn’t be but I have a bit of a blank spot on these

  • 30 Passive Investor April 3, 2019, 10:00 pm

    I understand the argument about short duration being preferable (The long duration of linkers is driven I think by the need for pension funds etc to match their long-term liabilities). I also understand why it is better to currency hedge non-inflation linked bonds.

    What I am not sure about is the desirability if currency hedging international inflation-linked bonds. After all I am really interested in UK inflation not inflation elsewhere. If inflation in the UK is worse than the rest of the world then sterling will fall and the international inflation linked non-hedged bonds would provide better protection than currency hedged bonds. (if inflation in the UK is better than the rest of the world then the hedging will improve returns but that doesn’t really matter).
    Have I misunderstood something?

  • 31 The Accumulator April 3, 2019, 10:42 pm

    @ Ben – Schoolboy error! My apologies and thanks for setting me straight 🙂

    @ ZX – Linker fund having duration that’s too long for the needs of portfolio and real yields at historic lows doesn’t seem to me to be an active view. Those are plain facts. If only the duration issue was true then I’d still make the same change. If only the real yield issue was true then I’d leave things alone. I’m not ditching bonds all together because real yields are at historical lows – in fact we’ve steadily lifestyled into more bonds in line with the original strategy. To my mind, ‘active’ means market timing and stock picking. This isn’t a tactical move in pursuit of the hot sector. It’s a strategic shift into a fund better suited to our needs. The nominal gilt fund duration is fine at the moment but I’ll need to start moving into a shorter duration fund soon enough to stay in step with remaining time horizon. FWIW, yes I would be inclined to move away from high beta index at high valuation. There aren’t suitable funds available to show it for the Slow & Steady portfolio, but in my personal portfolio I tilt towards value. I can’t remember the precise p/e figures for Japan in the 1980s, I think it got to p/e 60 or thereabouts. At some point it’s reasonable to reduce your exposure to an overheating market. There are rules based mechanisms to help you do that, we’ve just never got into it with the Slow & Steady. Personally I don’t believe a passive investor should act like the proverbial coma patient.

    @ Passive Investor – currency movements are subject to more factors than inflation. What I want is inflation-protection not currency risk, so I choose to hedge out the currency risk. Also, you posit a binary world. Either UK inflation is worse than the rest of the world or better. What about if it’s about the same? Or somewhere within the pack?

    @ Fatbrita – pieces that might help you with your asset allocation question:


  • 32 Passive Investor April 4, 2019, 6:20 am

    @ accumulator Yes currency movements are subject to lots of factors (particularly in the short-term) but over the medium to long-term a currency with high inflation will depreciate against a low inflation currency. When you say you want inflation-protection what you surely really mean is that you want domestic inflation-protection. (I don’t care if inflation is stable in the UK but high in the Eurozone, Switzerland and Japan ) So I remain curious as to the benefits of currency-hedging international inflation linked bonds. I haven’t yet been able to find a paper or article addressing this question head on but would be interested to know if you have.

  • 33 AncientI April 4, 2019, 7:36 am

    Is there an expectation that inflation is going to spiral out of control in the near future?

  • 34 Passive investor April 4, 2019, 8:56 am

    @ancienti. I don’t think there is (or not by the markets at least). But inflation linked bonds are designed to manage unexpected inflation as there is an inflation expectation in their price (broadkt speaking the difference between the yield offered by standard bonds (gilts) and inflation-linked bonds (linkers)).

    Though as accumulator says because of the very long duration of linkers they are unlikely to provide good inflation protection at present – any uplift in price from unexpected inflation will be ‘wiped out’ by a fall in price due to a rise in interest rates.

  • 35 MJCROSS April 4, 2019, 9:51 am

    Since we’re already over the Rubicon from an active/passive perspective, LQDH (iShares $ Corp Bond Interest Rate Hedged UCITS ETF USD) seems to be doing something interesting…
    The factsheet lists the weighted average maturity of the portfolio as 12.76 yrs with an effective duration/ of only 0.23 (?!)
    Perhaps this apparent anti-gravity act is because the fund “sells US treasury futures to reduce the performance impact caused by movements in government bond rates”.
    Does this give LQDH some interesting features from a portfolio perspective?

  • 36 oldie April 4, 2019, 10:01 am

    How do you make the judgment that 5% of the portfolio (or even 25%) provides the level of cover needed for the chance of a high level of inflation happening. ?

    I suppose maybe same issue as to the appropriate level of equities ?

  • 37 MJCROSS April 4, 2019, 11:23 am

    @ oldie – The level of equities (vs. bonds) depends on the return you aim to get from your portfolio vs. your investing horizon, risk tolerance and risk capacity … I’d strongly recommend the ‘smarter investing’ book (by Tim Hale) as a good straightforward starting point for this.

  • 38 rick24 April 4, 2019, 11:32 am

    I came to the same conclusion as the Accumulator some time ago and bought a slug of Royal London. The duration of the Vanguard fund makes it vulnerable to real interest rates. Thanks for the reference to the L&G passive. I hadn’t spotted that.

  • 39 The Accumulator April 4, 2019, 1:29 pm

    @ Oldie – The Bogleheads make this simple by splitting fixed income into 50:50 linkers vs conventional bonds. There are papers out there that argue for 100% linkers but I find that hard to swallow from a diversification perspective. If I was a retiree with a portfolio so large that I would still be withdrawing a low % after a massive crash then maybe I’d live with that. I think that 5% in linkers is too low for the Slow & Steady portfolio but this is quite an upheaval by our standards and we have time to make good. Therefore I’ll likely rebalance towards linkers quite aggressively for the next few years with a view to a 50:50 split eventually.

    @ AncientI – just to reiterate Passive Investor’s point, by definition we’re trying to protect against unexpected, high inflation with this move. The kind of risk that has emerged many times historically and can devastate a portfolio.

    @ Passive Investor – I have read research that says a globalised portfolio of developed world linkers correlates with UK inflation reasonably well. I go into it here and link to further research: https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/

    Yes, I’d rather have a short or intermediate UK linker fund, or index linked certificates, but none are available so no point wishing they were. At least the Royal London fund has 20% UK linkers while the rest of their portfolio of developed world linkers is the next best thing.

  • 40 DavidC April 4, 2019, 1:42 pm

    I don’t know a lot about bonds, but looking at the Royal London fund factsheet, only a few of the top holdings are specifically named as index-linked. Does that mean that the fund has achieved its short duration by mixing in non-linked bonds (which the mandate appears to allow) rather than finding shorter duration index-linked bonds out in the global world? In which case, is it really going to do the inflation-protection job that you want it to do? Or is it just that the bond names aren’t clear?

  • 41 The Accumulator April 4, 2019, 1:54 pm

    Hi David – bond names aren’t clear, it also does use some conventional bonds, as mentioned in the piece, but the portfolio is predominantly linkers. The factsheet doesn’t give the full picture, there’s info spread across several different documents, not all of which are available from one convenient link. The L&G linker tracker fund does a much better job on the transparency score (once you find the right link) and this is a strong point in its favour if you don’t want to spend time joining the dots.

  • 42 ZXSpectrum48k April 4, 2019, 5:13 pm

    @MJCROSS: LQDH is a corporate bond fund. You can decompose the yield on each corporate bond into a Treasury yield (of the same maturity) plus a credit spread over that US Treasury. As a result the fund’s duration can be decomposed into two partial durations: an interest rate duration that represents it’s price sensitivity to a move in the Treasury curve and a spread duration that represents it’s sensitivity to a move in the credit curve. The fund then hedges the Treasury partial duration by selling appropriate amounts of Treasury futures. As a result it’s interest duration is close to zero. Nonetheless, it will still have spread duration (probably of around 10 given it’s maturity of 12). This fund is attempting to offer a cleaner exposure to corporate bond credit risk without the US Treasury interest rate risk.

  • 43 blake April 4, 2019, 5:28 pm

    a bit new to passive investing and have not given up all of my investment trusts but thinking of your slow and steady portfolio in general rather then the bond part i have a question.You have used an all world ex UK and others mention Global all caps or all World with say 2000 – 6000 stocks used depending on the fund.But looking at annualised returns over different time frames there does not seem much difference in using the L&G global 100 index (it might even shade it with performance and only charges 0.14% so its not that expensive)
    If we assume the market is driven by these stocks would you see that continuing or would the others with 1000’s of stocks do better for some reason in the future?

  • 44 The Accumulator April 4, 2019, 5:44 pm

    @ Blake – diversification is known as ‘the only free lunch in investing’ because seasoned investors come to realise that nobody can predict the future. Here’s some links that will help:




  • 45 Blake April 4, 2019, 6:08 pm

    thanks for the links and can see by the first One the logic to investing all world even down to what will be micro % compared say to the Apple % within it so may need a rethink(but still wondering if the bigger names drive the rest)

  • 46 The Accumulator April 4, 2019, 9:07 pm

    Big names rise and fall. Many valuable companies you will never have heard of. Why spurn diversification for 0.01%?

  • 47 Olivier April 4, 2019, 10:23 pm

    Not clear to me that your objective ( hedging UK inflation ) is met best with this fund. The fund looks to have as much US TIPS inflation bond exposure as UK inflation, with some exposure to other European countries for the remaining portion. It is invested in ~5 year duration bonds.

    Against this :
    1. The biggest potential driver of <5y short term UK RPI inflation is a potential FX devaluation ( like in 2008-2010 ), i.e. Brexit. US inflation won't help with this. Just buying direct the March 2024 index linked gilt (GB00B85SFQ54) in your brokerage account will be simpler, plus coupons will be tax free since it's a gilt. And if your actual concern is FX devaluation, being overweight non-US assets would hedge the pure FX devaluation risk better.

    2. Another potential driver is a technical reform of the RPI index calculations, under discussion, that would impact the returns on RPI-linked gilts but not change actual experienced inflation. This means gilts are actually not a perfect hedge against experienced inflation.

  • 48 J.D. April 5, 2019, 4:16 am

    Non-UK (and non-US) investor here. Really like your information and impressed how relevant your information is even thought much of it is from a decade ago. You have a skill for picking the concepts which makes the information timeless.

    Anyway, just wanted to point out that your target adds up to 105%
    5 + 37 + 6 + 10 + 6 + 31 + 5 + 5 = 105%


  • 49 The Accumulator April 5, 2019, 9:16 am

    Buying ladders of index linked gilts is a perfectly reasonable approach but comes with its own issues and is beyond the scope of this model passive portfolio.

    I think it’s obvious from the article and ensuing comments that the objective is not tactical positioning for single issue threats like Brexit. Nor is the concern FX devaluation – in which case the global equities allocation should do rather nicely.

    Reforms of RPI calculations – whether they do or do not happen – are beyond our circle of control. You could argue all day about whether CPI, RPI or any other kind of I matches your personal inflation rate. Of course the perfect hedge does not exist. The question is: what’s the best ‘imperfect’ tool available.

  • 50 Duncurin April 5, 2019, 1:38 pm

    It’s not that “all this seems too much like hard work”, it’s that the constant worry over choices would adversely affect my mental health. So all my investments are in the LifeStrategy 80 fund. Their gain in Q1 this year was 8.27%, annualised over 5yr was 9.54% (if I understand Morningstar correctly). So it seems to be more-or-less keeping pace with your Slow and Steady portfolio, which is gratifying. Is it sufficiently protected against disaster? I’ve no idea, but worrying about it won’t do me any good! (I’m lucky enough to have a reasonable pension, so the investments only have to fund discretionary spending.)

  • 51 Gentleman's Family Finances April 5, 2019, 2:03 pm

    Slow and steady is good – but I would suggest that keeping it simple is just as important.

  • 52 The Investor April 5, 2019, 2:08 pm

    @J.D. — Thanks for the nice comments. Regarding the maths, there is a logic to author @TA’s apparent madness. He said to me:

    They don’t. It’s because you’re adding uk linkers and global linkers. But we replaced U.K. with global. I left the allocation in so people could see it was a straight swap. I can see how it could be confusing though.

    I can see the use of leaving it in for this month but also agree it’s confusing. So I’ve amended the headings of the two relevant tranches. Hope it’s clearer now. Cheers!

  • 53 The Rhino April 5, 2019, 4:14 pm

    @Duncurin – have you compared and contrasted your actual returns (net return after all costs) against the vanguard literature data for VGLS80 by any chance? How do they stack up? I think I’m going to attempt a similar calculation. Are you looking at the acc. or inc. version?

  • 54 Vanguardfan April 5, 2019, 7:18 pm

    @duncurin, I think I’m with you. Every time TA writes about some kind of nuance it stresses me out, now I’m thinking ‘yikes, should I get this shiny new inflation protection too?’
    Ok I know the real answer is to switch off Monevator, but it’s too good…
    I am edging towards more and more simplicity though. The interesting thing is that I looked after my father’s assets and had no problem dumping the whole lot in LS60, why can’t I do that with ours?

  • 55 Duncurin April 5, 2019, 8:57 pm

    I don’t keep detailed records. I’m in drawdown. On 4th April 2016 my (accumulation) units were worth £145.05 each (some were sold at that price). On 1st April 2019 they were worth £199.91 each (again sold at that price), which represents an increase of 37.8%. Fiddling about with logs gives an annualised 3 year gain of 11.28%. According to Morningstar the official 3yr annualised gain was 11.62%.

    In 2016 they were held by Charles Stanley Direct and I was paying 0.25% pa charges. When CSD increased their charges to 0.35% I switched to Vanguard who charge 0.15% pa. So presumably if I’d been with Vanguard all along (not possible as they didn’t offer investment accounts in 2016) my net annualised gain over the 3yr would have been 11.47%.

    Sorry if this all sounds hopelessly naive!

    I think Monevator is great too. I read it a lot before deciding to stick everything in LS80 (heavily influenced by that Lars chappie). I still read it out of interest, but I know that fiddling about would cause me anxiety. I’m just glad that LS80 seems to be doing fairly well compared to The Accumulator’s slow & steady portfolio.

  • 56 Duncurin April 5, 2019, 9:11 pm

    Oops! Sorry, I meant that my annualised 3yr gain after deduction of 0.15%pa fees would have been 11.13%.

    That really is rather pleasing, despite the various dangers that could strike without warning at any time. According to the BoE inflation averaged 2.9% pa over the past three years, so the portfolio has increased by about 8% pa in real terms.

  • 57 The Accumulator April 5, 2019, 9:37 pm

    @ Vanguardfan – sorry for stressing you out 😉

    I think a Lifestrategy portfolio is a fine choice. However, Duncurin is in the enviable position of not being reliant on his portfolio. I think I’m right in saying, Duncurin, that your pension takes care of your essentials. On the assumption that your pension (perhaps a mix of final salary and state) is index-linked then you have plenty of inflation protection. The pension replaces the linker fund in this scenario. I will not enjoy that level of in-built inflation protection. So if I was boiling everything down to the simplest solution for me: I’d choose something like LifeStrategy and add an inflation-linked fund. Intriguingly, Vanguard Target Date funds do increase their allocation to index-linked gilts as the target date nears.

  • 58 Grislybear April 5, 2019, 10:09 pm

    Very good article on index linked funds. I can follow your thinking and your conclusions. I had a good think and done some research on linkers last year. I came to the conclusion that the best way for me to reduce duration was to combine a regular UK linker etf (duration 22 years) with a US 5 year tipps fund (duration 2 years). The end result would be a duration of whatever you want depending on the mix.

  • 59 uhm April 10, 2019, 10:14 pm

    Did you look at the X-trackers Global Inflation Linked Bond ETF GBP Hedged? It has a fee of 0.25% as well. Was the duration or the average maturity a factor?
    I have held it and the actively managed Fidelity Global Inflation Linked Bond Fund (as recommended by Tim Hale at the time). Between the two, the x-trackers ETF has performed far better.

  • 60 Haphazard April 11, 2019, 9:48 am

    Great article on how to deal with inflation linked funds. I’d be tempted by the Royal London fund. But I’ve never bought distributing funds – not in an ISA. Wouldn’t that mean charges for reinvesting – at least with some brokers? There doesn’t seem to be a non-distributing version of it. Or am I missing something?
    And does all of this matter to those of us with a 20-25 year horizon?

  • 61 The Accumulator April 19, 2019, 10:58 am

    @ Uhm – I think XGIG is a reasonable choice. For the Slow & Steady portfolio, the duration is a little high. It’s around 12 and I’d only have to introduce a shorter duration fund in the next few months anyway to start bringing that down. That’s a bit too much faff. However, if your time horizon is above 12 then it’s worth a look especially as it looks to contain around 30% index-linked gilts. There are a couple of other things that make me uncomfortable: it tracks the Euro version of the index even though it hedges to £. I’d need to look into that more deeply to understand the full implications but intuitively that makes me uneasy. Secondly, important information on the ETF’s asset allocation is based on the index rather than the ETF’s actual holdings. It samples the index rather than fully replicates. I’d prefer to see how faithful the ETF is to its index. All that said, the very fact that it tracks a developed world linker index is a step up from active management, so certainly this ETF should be in the mix if you’re looking for inflation protection. The Fidelity fund seems fine too but expensive at 0.51% OCF. Active management too, and quite a wide-ranging remit, but they publish plenty of info so you can keep an eye on it. How long have you held them both?
    Thanks very much for bringing up these two funds, btw. Helps round out the discussion and widen everyone’s options.

  • 62 The Accumulator April 19, 2019, 11:10 am

    @ Haphazard – You can reinvest distributions at the same time as making new contributions, so there’s no need for an Inc fund to increase your dealing costs if your broker charges them. I also find Inc distributions handy to set against platform fees. There does seems to be an Acc version on Royal London’s books but I couldn’t find a broker that actually makes it available.
    Re: 20-25 year time horizon. This is a great question. For me, it depends on your risk tolerance. All things being equal, and assuming you’ll review your position as the time horizon counts down, I think it matters much less. But it depends on how you’d react during a period of rampant inflation that hit the rest of your portfolio hard. It’s a credible scenario and I’m inclined to protect myself from it by diversifying into the best asset class available. I’d choose a longer duration fund with this time horizon though I still wouldn’t have the courage to opt for an index-linked gilt fund.

  • 63 uhm May 1, 2019, 10:24 am

    The Fidelity fund is on a tiny overall profit over four years, but only with dividends included.
    The Xtrackers etf over the same period is on a 4.27% capital gain, without including dividends (which were exceptional for some reason in 2016). The Xtrackers etf has been the better performer. I am considering tidying up by selling the Fidelity and purchasing the Capital Gearing Absolute Return fund which has a significant portion in inflation linked bonds (mainly TIPS)

  • 64 Toby May 29, 2019, 3:11 pm

    Hi Monevator,
    I have my money invested in the VANGUARD LIFESTRATEGY 80% EQUITY ACCUMULATION fund currently, which has 1.89% currently invested in Vanguard U.K. Inflation-Linked Gilt Index Gross.
    Do I need to invest 5% from my portfolio into LEGAL & GENERAL GLOBAL INFLATION LNK BOND INDX CLASS C – ACCUMULATION as well, or can I leave my money in the Vanguard 80% fund?

  • 65 Dan Bond July 19, 2019, 12:42 pm

    Thx for the useful update Monevator. V appreciated.

    A quick question re: Vanguard UK Inflation-Linked Gilt Index Fund v Royal London Short Duration Global Index-Linked Fund., and their respective interest rate risks …

    I thought that the whole point of UK Inflation Linked Gilts is that they are linked to inflation rates (not necessarily interest rates)? So they move in line with inflation .. So Im lost as to where the interest rate risk is.

    I appreciate you’ve most likely answered this in the article but Im not quite clear, so any further explanation is appreciated.


  • 66 Don September 25, 2019, 1:32 pm

    If I’m not mistaken, there’s a relatively new ETF, though it doesn’t seem to be hedged. But cheap: Lyxor Core Global Inflation-Linked 1-10Y Bond (GIST)

  • 67 Chris B May 20, 2021, 10:33 pm

    It seems the two funds aren’t quite the same? The Royal London fund is “government and corporate bonds that may be investment grade or non-investment grade”, whereas the L&G fund is “World Government Ex UK” investment grade. Hence the Royal London has a higher risk rating.

    An ETF alternative might be the iShares TIPS 0-5 GBP Hedged (TI5G), given that the bulk of global government bonds are U.S. anyway.

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