Chase, JP Morgan’s UK retail banking arm, is hoovering up money with its 3.3% AER instant access deposit rate. It is not hard to understand why. After a more than a decade of getting no interest on cash deposits it is little wonder many are taking the opportunity to earn some valuable income again.
But is it a good deal?
Well, not really. According to the Wall Street Journal, at the end of 2022 JP Morgan owned investments worth more than $2tn. With that balance sheet they can buy UK Gilts backed by UK taxpayers that will pay them roughly 5% for two years, so on every £1m of deposits they take they can make a cool £17,000 per year gross profit. They don’t have to talk to their customers, give any advice, write any reports, they just have to offer liquidity so that people can withdraw when they want. It’s a very easy way to make 1.7% p.a.
Meanwhile, if you’re a 45% taxpayer, by the time you have declared and paid the tax on your Chase account the return after tax will be just 1.82% per year.
So, how do you as an investor get near that 5% that Chase has?
We have a relatively unique situation in Gilts right now that because the Gilts in circulation were issued when interest rates were much lower, they have all gone down in capital value to offer that 5% rate.
For example;
This Gilt which matures in October 2026 for £100 can be bought today for c£86. And here is the good bit, the gain in value back to £100 is tax free. So this Gilt is offering:
- 16.3% (14/86) for 3 years and 4 months so 4.90% per year tax free
- Plus, 0.43% of taxable interest each year (Coupon of 0.375%/ 0.86 the price paid).
So the total return is 5.33% per year, which for a basic rate tax payer will net down to 5.24% and a higher rate tax payer to 5.14% per year.
For a higher rate tax payer the Chase account return on £200,000 is £3,640 p.a. In this gilt and after allowing for Tideway’s fee it is £9,280 p.a. that’s a 155% increase. Plus, you’ve got that rate for 3 years 4 months even if base rates start to come down next year.
But, what happens if I want my money back before October 2026, I hear you ask?
Well, firstly gilts are very liquid and trade every day the stock market is open. It will take your wealth manager c.7 days to get you your cash. Secondly, the interest payment on the Gilt accrues daily so you don’t lose any of the interest element by cashing in early.
Finally we must look at the capital value. Will you be able to sell for more or less than the £86 paid?
Here is where there is a bit of risk, but not much. If base interest rates continue to rise above 5% to say 6%, then you might get a little less for your Gilt than you would expect after say 6 months.
You might expect to sell for £88 (86 +2%) but only get £83, you would have lost 3.5%. Those who stayed invested could now expect 6% p.a. returns to October 2026, but the end value will still be £100.
If rates stay as they are, you get the expected £88.
If rates fall in the next 6 months, say back to 4%, then you would get more, you would expect to get £92 or a cool 7% tax free in six months.
So the selling out early question just depends on rate moves from here. Interestingly, this Gilt is relatively unmoved this week.
TREASURY 0.375% 22/10/2026 (T26A) GILT (Source Hargreaves Lansdown)
In fact it went up for a bit last week as the 0.5% increase was announced before falling back to the start of the week price. That tells you:
- The Base Rate hike was already priced in to these 3 year rates
- Actually, for a few hours gilt investors thought, counterintuitively, that the higher 0.5% increase reduced the risk of further rises – which you can see could well be the case.
In summary, Gilts are a great place to earn some tax efficient returns over 1, 2 and 3 years. If there is a strong chance you might need your money back sooner than, say, 1 year, or simply can’t get your head around this, then by all means use the Chase facility, it is very secure.
Fund in Focus: Franklin Templeton Clearbridge Global Infrastructure Income:
Introduction:
Listed Infrastructure strategy founded in 2010 by Australian firm RARE (Risk Adjusted Returns to Equity) Infrastructure. Legg Mason acquired a majority equity stake in RARE Infrastructure in 2015 with the team formerly integrated into Clearbridge (then a Legg Mason company) in 2019. Franklin Templeton completed acquisition of Legg Mason in 2020.
Despite multiple brand changes over the last eight years, the team have retained their original investment philosophy and autonomy over the investment process with the senior infrastructure specialists who founded the strategy largely unchanged: Nick Langley joined the firm in 2006, Charles Hamieh (2010), Shane Hurst (2010), Daniel Chu (2012). Tideway first invested in the strategy in February 2019 and remains a high conviction pick in portfolios.
Investment Philosophy:
As the original RARE (Risk-Adjusted Returns to Equity) firm name suggests the team have a particular investment style preferring to invest in assets producing cashflows underpinned by regulation or long-term contracts that can be forecasted:
- Regulated and Contracted Utilities: Asset-based regulation (Return on Assets, Return on Equity); Poles, wires, pipes; Defensive assets with a high income and low exposure to GDP. Examples include Water, Electricity, Gas and Renewables.
- User-Pays Assets: Concessions-based contracts; Roads, rail, ports, airports, communications; Growth assets with a lower income yield and leveraged to GDP.
Equally, the fund does not invest in competitive assets which have higher variability of cashflows and cannot be modelled easily. Community & social assets are not considered for the universe as returns on offer are not very attractive enough with insufficient liquidity.
Rationale for inclusion in Tideway portfolios:
- Defensive Growth Asset
- Stable Dividends
- Inflation protection qualities
Defensive Growth Asset:
Infrastructure’s defensive nature stems from its focus on cash flows and underlying earnings. The stability of infrastructure assets is due to their essential role in providing services such as water, electricity, gas, toll roads, and other critical infrastructure services.
Even during economic downturns, consumers continue to rely on these services. This stability translates into lower volatility and resilience in infrastructure revenue throughout the business cycle. This defensiveness is illustrated by the funds return profile, participating in 68% of the returns during positive markets compared to just 48% of the downside versus Global Equities (MSCI ACWI).
Moreover, recent regulatory and policy tailwinds indicate steady spending in infrastructure, which further supports its defensive characteristics and growth potential. Initiatives like the U.S. Inflation Reduction Act and Europe’s Green Deal Industrial Plan encourage investments in electrification, renewables, and the transformation of energy and transport infrastructure. These policies recognise the significance of infrastructure in achieving net-zero goals and promote the expansion of regulated utilities and related infrastructure.
Stable Dividends:
The fund has delivered an historic yield of 5.11% with a compound annualised dividend growth rate of 5.8% per annum compared to inflation at 2.4% over the same period. The internal Rate of Return historically in the range of 8% and 15% – currently at the stop end of this range and attractive versus history – underpinned forward dividend 5.1% with 5% div growth. Please note that these figures are not a guarantee of future returns.
Inflation Hedge:
While the path of inflation remains uncertain, the fund’s strength is that 90% of the underlying stocks’ revenues are linked to inflation therefore unlike most fixed income assets, infrastructure dividends act as an effective hedge against inflation. This is due to cash flows underpinned by regulation or long-term contracts often linked to inflation. Both utilities and user-pays assets like toll roads or rail generate inflation-linked revenues, giving infrastructure inflation hedging characteristics.
Performance:
The fund has produced top decile total returns and risk-adjusted performance over most periods since inception though returns rank third quartile over one year and second quartile year to date versus the IA Infrastructure peer group.
Recent underperformance versus peers has been down to the relative defensiveness of the portfolio versus peers executed through a large underweight position in airports (underweight peer group by c.20%) which are more sensitive to GDP than other areas of the portfolio. The team sold out of most of their airport exposure on valuation grounds, missing the 2023 rally, though realised strong gains from the space from initial investment. Other headwinds to performance have been an allocation to Telecom REITs, which have dragged down due to an increase in global discount rates. Stock selection and allocation of capital has otherwise been very good.
Fund Positioning:
Remains diversified from a risk perspective with a good spread across geographies and infrastructure sectors within their universe.
Summary:
- Attractive long-term returns underpinned predictable cashflows.
- Secular Growth story with Infrastructure worldwide needing further investment with tailwinds from decarbonisation.
- Healthy dividend yield and growth provide a hedge versus inflation.
- Participates in positive markets and defends well in down markets.
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- We always recommend that you seek professional regulated financial advice before investing.
