The War on Savers

Mark the date; 5 March 2009. The date that war was declared in the UK.

Not a shot was fired, not an incursion made and not an Archduke assassination was to be seen, but be under no illusion, war was indeed declared – and it is a war that continues to generate casualties in their millions, with bigger devastation potentially on the horizon.

The war, when it came, was a globally coordinated campaign. A global war on savers. Enacted by central bankers worldwide and ruthlessly implemented, it came to UK shores in March 2009 in the form of 0.5% interest rates and a monetary experiment known as ‘Quantitative Easing’ as the Bank of England reacted to a credit crisis that was reaching its nadir.

Since its declaration, the scars of war are to be found wherever we care to look. For depositors unfortunate enough to have left their money in a UK bank, the 4% total return they have received pales into insignificance against the 30% increase in inflation witnessed over the same time. Representing a drop of over a quarter in purchasing power in less than a decade, this transfer of wealth from savers to borrowers represents the consequences of a continuous crusade of stealth upon savers’ hard-earned.

UK Inflation (RPI) since March 2008

Source: ONS

For the public purse, the funding of the war is equally apparent. With debt as a proportion of Gross Domestic Product (GDP) rising at a pace only seen during the WWI and WWII campaigns, we now see the UK Government having to fund continuous budget deficits with a debt to GDP ratio rapidly approaching 90%.

UK Debt/GDP since 1900

Source: Bank of England

Such largesse of course comes at a cost. Having now issued over £1 trillion of public debt since the start of the credit crisis, the ownership of UK national debt has changed dramatically over the past decade thanks to the policy of the Bank of England to purchase £435bn of Gilts in order to enact its QE programme.

Gilt and Treasury bill holdings

Source: UK Debt Management Office

Coupled with the one-off purchase of Gilts by the banking sector to meet regulatory requirements and the generosity of overseas investors to purchase over £300bn of our national debt, it becomes clear that the increase in borrowing was only possible thanks to the sale of bonds to ‘investors’ who would not naturally hold such debt and who may well choose not to do so in the future.

Which makes the current situation in the Government bond market all the more confusing for a rational investor. Let’s first of all look at the potential returns, where thanks to low interest rates and the manipulation of the market by the Bank of England, valuations have become so extreme as to push the expected return on all Gilts to levels below the rate of expected inflation. An investor in Gilts would knowingly, in advance, be agreeing to destroy their purchasing power – which, in our view, makes them not investors at all.

UK Government Bond Duration

Source: Bloomberg

For this paltry return, investors face a significant level of risk. At a time when economies are beginning to recover from the crisis and central banks are now actively considering interest rate increases, the degree to which bonds are susceptible to rises in rates has never been bigger. Quite simply, when taken together with the $9 trillion of bonds traded around the globe on negative yields, we believe we could be witnessing the greatest misallocation of capital in the history of mankind.

Yield on 10-year Gilt since 1999

Source: Bloomberg

Which is why, at AJ Bell, as intelligent, long-term investors, we have taken the opportunity to remove all standard UK Government Bonds from our portfolios in favour of very short-dated, low risk alternatives.

Allocation to Gilts for each portfolio table

Source: AJ Bell Investments

For our most cautious portfolios, this represents a shift in allocation of 27% - demonstrating our commitment to act with conviction when we believe the market conditions warrant. In contrast to our purely passive competitors, we believe our desire to deliver ‘Active Performance at a Passive Price’ is one of the features that makes our offering unique. For more information, speak to your Business Development Manager.

Past performance is not indicative of future performance. The value of investments may go down as well as up and the income generated by investments is not guaranteed and may fluctuate. You may receive back less than the amount that you invested.

This information is for indicative purposes only and is not intended, and should not be construed, as investment advice. The information contained in this document has been taken from the sources stated and is believed to be reliable and accurate, but without further investigation cannot be warranted or guaranteed to be wholly correct. The views and opinions expressed in this document are not forecasts or recommendations in relation to investment decisions.

The information and data presented in this document were believed to be correct at the time of writing and we are not liable for any subsequent changes.

Managing Director, AJ Bell Investments

Kevin began his career in the financial services industry as an Investment Analyst, eventually progressing to become Chief Investment Officer at a major private bank. He then took on the position of Group Head of Research & Strategy for a Luxembourg-based private banking group, before moving into a number of consultant roles for various investment management and banking businesses. In October 2017 he joined AJ Bell Investments as Managing Director and CIO.