Why I Own: GLTY

Lucy Walker
Firm: Sarasin & Partners
Location: London
Founded: 1983
AUM: £14.6 Billion
ALL ETFs? No

When did you start using GLTY?
We have been using it for about a year across our Sarasin Global Fund of Funds.

Why did you choose GLTY?
It is very difficult to generate any alpha in UK government bonds, thus it does not make sense to use an active manager. The ETF bears only a 15 basis points total expense ratio, which is one of the lowest in the sector. It also distributes semi-annually, which is helpful given the increasing need for income, particularly in light of pension reform. Since the ETF launched in 2012, its performance has been very close to the Barclays UK Gilt Index and as such, tracking error has been low.

Is GLTY liquid?
On-screen volume is around £1 million a day which is relatively low, but generally an ETF is as liquid as the underlying market that it tracks, and clearly gilts are a very liquid market. Also, a lot of ETF trading happens over-the-counter so the true liquidity is far greater than on-screen volume would imply.

How do you use GLTY?
It provides our UK government bond exposure and, in terms of our fund of funds range, the Sarasin Global Strategic Fund of Funds has the largest position, since it has the lowest equity exposure. Whilst there is no doubt that a yield of 2% on the 10-year UK government bond looks far less attractive than it did a decade ago, we attempt to have a balanced portfolio that can weather all storms.

UK interest rates will likely increase in the coming months, but the Greek crisis may well delay the Bank of England taking action, and so a small position in government bonds is a good hedge for a tail event. After all, so-called black swan events cannot be predicted, even if justification is easily given in hindsight.

Do you find GLTY is weighted in one particular area?
The ETF owns around 35 bonds of varying maturities, all issued by the UK government, and the effective duration is approximately 10 years. Since this interest rate sensitivity is high, we correspondingly have fairly small positions.

What else would you use to replace GLTY?
We could buy government bonds directly. This would be cheaper, as it would avoid the 15 basis points annual fee, but this would be something of a shotgun approach, as you would likely only own one or two particular maturities, rather than 35 bonds with the ETF.