‘Why would you do that?’: Franklin Templeton defends UK gilts launch

Franklin Templeton’s head of European fixed income has defended their recent launch of a UK gilt fund, becoming the only asset manager to launch a product in the IA sector this year.

The Franklin UK Gilt fund was launched in February alongside the UK Corporate Bond fund, the first fixed income products from the asset manager focussed on the UK.

Since inception they have returned 1.2 per cent and 2.7 per cent respectively. The FTSE UK Gilts index has returned 1.3 per cent over the period, while the Markit iBoxx GBP Non Gilts index has returned 2.7 per cent.

David Zahn says the product launches were in response to client demand, which was such that they even brought the launch date forward. “We were going to launch these funds this year, but we decided to launch them four or five months earlier.”

Zahn admits UK gilts are not currently a popular sector for active fund launches. The Aberdeen Sterling Long Dated Government Bond fund launched in May last year was the previous launch within the IA sector, FE data shows.

“Most people looked at us and said ‘you’re launching an active gilt fund, why would you do that?’ I think a lot of them see gilts as a passive area, because most active gilt funds aren’t very large.”

Top performing active UK Gilt funds over three years

Name 3 year Cumulative Performance Fund Size(m)
Newton – Long Gilt 38.2 46.3
F&C – Institutional Retirement Annuity 37.8 6.5
Aberdeen – Sterling Long Dated Government Bond 36.3 44.1
Henderson Inst – Long Dated Gilt 34.5 45.1
Invesco – Gilt 20.9 35.5
Source: FE

To compete with passive products the AMC for the fund is 25bps.

“Historically people have thought you can’t add value, because there’s no real credit analysis. But the gilt yield curve is incredibly long: it goes out over 50 years.

“You can add a lot of value by where you are on the yield curve, by looking at what type of coupon you’re getting and also with ours we can put a small percentage in other markets.”

Brexit and the potential end of the bond bull market will add to active funds’ potential to outperform, Zahn adds.

“You can’t say the end of the bull market is going to happen in the next six months or the next year. That’s why I think you want to move out of passive into active now so that when that does happen you’re in the right spot.”

Investors will look to gilts as a safe haven asset during the UK’s exit from the EU, Zahn adds.

“The whole negotiation with Europe looks like it will be incredibly painful given the government is struggling to have one voice in terms of what they want.”

Since inception the fund has avoided “fully valued” inflation-linked bonds and its entire exposure has been to the UK, despite potential to add 10 per cent to other countries.

“Through a little bit of currency, a little bit of other country exposure, but I also think managing that duration, you can add quite a bit of value.”

“In a market that will probably be more sideways moving and more volatile active investors can add value, whereas passive investors will just earn the coupon over that volatile year. Active investors, if it gets too expensive or cheap, we can position accordingly.”

Top performing passive UK Gilt funds over three years

Name 3 year Cumulative Performance Fund Size(m)
Vanguard – UK Long Duration Gilt Index 37.4 308.4
Vanguard – UK Government Bond Index 22.6 2,150.3
iShares – UK Gilts All Stocks Index 20.6 4,380.7
L&G – All Stocks Gilt Index Trust 19.9 1,196.7
HSBC – UK Gilt Index 19.8 107.6
Source: FE