Turmoil favours short-dated gilts

A PAIR of new gilt unit trusts from the Aberdeen Trust Group, offering a choice of income or growth, will be managed by Cheval Investments, which specialises in fixed-interest portfolios for Lloyd's members.

Jaqueline Gourlay, Cheval's chairman, feels that, while gilts tend to be popular at times of economic uncertainty, they are not 'widely enough available without unacceptably high front-end fees or management charges'. Accordingly, the two funds will have a 1 per cent annual management fee but no front-end charge.

A stock argument against investing in gilts through unit trusts has been that, although the costs of dealing in gilts are minimal, fund charges are high. Investors can buy pounds 1,000 of gilts through the National Savings Stock Register for only pounds 4. Also, unit trusts are subject to capital gains tax, whereas gilts held directly are not.

Investors can get around the capital gains tax problem - which should affect only large holdings - by bed and breakfasting units. Gilts are a technical investment and for most people, professional management outweighs the charges.

Gilt trusts have been more attractive than share-based funds over the past five years. Of the top performers in the table, Abbey Capital Reserve and Fidelity Gilt & Fixed Interest have no front-end charge.

The sterling crisis has thrown expectations for interest rates and inflation into turmoil, and gilt specialists have emphasised two points: the increased attraction of index-linked stock and, among conventional gilts, of short-dated rather than long-dated stocks.

The decision to leave the ERM, says Credit Suisse Asset Management's chief economist, Michael Thomas, suggests there will be renewed inflation. Index-linked gilts have begun to reflect this.

Long-dated stocks respond to interest rates as well as inflation. Yields on these stocks should rise - and prices fall - compared to stocks with short maturity dates. The greatest growth prospects, says Mr Thomas, are with the shorter stocks. His choice would be Treasury 8 3/4 per cent 1997, which can be bought through the Post Office. He also recommends most index-linked stock maturing before 2006.

People close to converting pension savings into a stream of income should not be dismayed by the interest rate cuts. Peter Quinton, director of The Annuity Bureau, said: 'Annuity rates are linked to long-term interest rates, which stay relatively unaffected by short-term fluctuations.'

----------------------------------------------------------------- Table: Gilt Trusts: Top Performers ----------------------------------------------------------------- Figues show the top five gilt unit trusts over one and five years*, results of pounds 100 invested, offer-to-bid, net income reinvested. ONE YEAR FIVE YEARS pounds pounds Aetna Preference 112.29 Abbey Capital Reserve 161.28 Fidelity Gilt & Fixed Grofund Gilt 153.37 Interest 109.99 Whittingdale Short-Dated Gilt 151.39 Abbey Capital Reserve 108.61 Kleinwort Benson Gilt Yield 149.33 Murray Acumen Reserve Abbey Gilt & Fixed Interest 148.96 Gilt Grth 107.51 Whittingdale Short-Dated 106.99 Gilt Worst Performer Abtrust Fixed Interest 88.68 Abtrust Fixed Interest 96.79 1 Oct 1991 and 1 Oct 1987 to 21 Sept 1992 ----------------------------------------------------------------- Source: Micropal -----------------------------------------------------------------