The Lemon Fool

Hello Folks,

Summary question: Given that it seems to be difficult to identify a comprehensive mixed bond fund, what do you think of the active "strategic" bond funds, which levy higher charges than trackers?

Detail:

Per the conventional wisdom my portfolio is too equity-heavy for my age . I've been working on identifying bond funds to start to increase the bond component with a view to preservation and also taking income over time when I do retire in the future.

Despite being simple on the surface, bonds seem to have complicated behaviours and influences over time. Some of the significant dimensions seem to be:

Interest Rates
Duration
Government/Corporate
Global/Home
Index-Linked or not
Hedged to home currency or not

I haven't identified a bond fund that gives a slice of everything, in the same way that perhaps VWRP does for equities. VAGS might come close.

With all this in mind I have been looking at options and noticed that a couple of Invesco active "strategic" bond funds I own did seem to navigate the bond crash quite well, while giving reasonable returns at other times. The "strategic" moniker seems to indicate that the managers have a lot of freedom to move their portfolio around over time, hopefully in response to economic conditions. However, they are expensive at ~0.65% OCF. I am wondering if, in this case, the active charges are actually worth it.

Here are some charts from Trustnet. I believe the Trustnet charts do include charges, but I am not completely sure on that point.

Given that it seems to be difficult to identify a comprehensive mixed bond fund, what do you think of the active "strategic" bond funds, which levy higher charges than trackers?

I like your thinking about your age. What makes you think you are too equity heavy in your early 50s?

I'm approaching 91 and have never found bonds to be worth considering. I did do some investing in gilts on behalf of my mother in law back in the 70s and 80s, I never felt the need to be anything other than 100% in equities, having looked at fixed interest stocks when I retired and could see no advantage.

My feelings are that the conventional thinking about having a proportion of fixed interest related to your age had been comprehensively discredited years ago, yet people still keep plugging it. What you need when you retire is a good and rising income from dividends, that grows faster than inflation. That can only come from equities. The more that you dilute that with fixed interest stock, the harder your equities have to work for you.

Think again.

TJH

tjh290633 wrote:What makes you think you are too equity heavy in your early 50s?

Mostly the conventional wisdom weighing on me.

Also a few more recent things:
1) With current interest rates you do actually get something back with bonds
2) The recent paper that looked at older-than-C20 and non-US returns that concluded that "stocks for the long run" is not a safe assumption. Paper is Stocks for the Long Run? Sometimes Yes, Sometimes No
3) Outlooks such as Vanguard 2024 are suggesting that equity returns may be more muted in the next decade after the last decade+ run up

But mostly the conventional wisdom as so much of the literature advocates for 60/40 or even 50/50 for me at this time.

I do try in my life to not drift along with the conventional wisdom without thinking it through, hence all my reading and questions about bonds recently.

This of any interest:

https://www.trustnet.com/News/13406708/ ... he-decade/

"Royal London stood out as the asset manager with the most consistently outperforming bond funds, particularly in the corporate bond sector, where one of its funds went close to a perfect track record."

I hold both the short dated global high yield fund, the sterling extra yield fund and Royal London's own 4.875 2049

Alongside BIPS, picked some up on the recent issue, NCYF and SMIF.

I also have some bonds with WiseAlpha.

Rules like "your age in bonds" assume that the bonds are very low risk. Gilts qualify, as do global aggregate bond funds hedged into sterling, such as VAGS.

Recently, we have had an unusual situation: the biggest ever bond crash combined with an equity bubble. If interest rates fall, that should hit both bonds and equities, but that has not happened this time. Investors have been keen to take on more risk, and bid equities and junk bonds higher and higher. The "strategic" bond funds have been lucky enough to ride that wave.

It is a fair bet that there is an equity and junk bond crash is coming along, but nobody knows when. The bubble may expand a lot more, or it may pop tomorrow. The conventional wisdom is to risk some money and keep some money safe. That seems sensible to me. A bond fund stuffed with junk will not keep your money safe in an equity crash.

tjh has a rather less than nuanced view on fixed interest. It is possible to trade fixed interest for capital gain and for rising interest depending where one is in the interest rate cycle. Of course timing is everything but one could say the same for equities. Looking at NWBD for example (which I hold) the price has varied between 170p and 120p over the last few years and the yield has varied accordingly.
Buying fixed interest as a buy and hold without attention to interest rates has the potential for significant capital loss but of course that capital loss will be accompanied by an uplift in yields.
Buying income producing equities from the FTSE 100 over the last few years has been a poor strategy with regard to total return.
tjh is not correct in saying that all you need in retirement is rising income. It depends on your circumstances. Capital appreciation and total return may be just as important. In my case it is more important.

everhopeful wrote:tjh has a rather less than nuanced view on fixed interest. It is possible to trade fixed interest for capital gain and for rising interest depending where one is in the interest rate cycle. Of course timing is everything but one could say the same for equities. Looking at NWBD for example (which I hold) the price has varied between 170p and 120p over the last few years and the yield has varied accordingly.
Buying fixed interest as a buy and hold without attention to interest rates has the potential for significant capital loss but of course that capital loss will be accompanied by an uplift in yields.
Buying income producing equities from the FTSE 100 over the last few years has been a poor strategy with regard to total return.
tjh is not correct in saying that all you need in retirement is rising income. It depends on your circumstances. Capital appreciation and total return may be just as important. In my case it is more important.

All true of course, but can you comment on where we are in the interest rate cycle? Like the famous stopped clock I rather suspect TJH's time has come/is coming for his view to be right...

GS

I think interest rates will be lower this time next year (what do I know) but I also think the FTSE 100 will be higher (what do I know). The latter has been such a poor investment that either it will improve to reflect its embedded value or more companies will leave for listings elsewhere.
I would not argue against holding equities even in the UK but I would argue against the view that it is never worth holding fixed interest.

Hi GS et al.

The most critical point EverHopeful made (I've been meaning to say so myself for some time, but alas have been busy) is that it depends on one's particular circumstances. Leaving aside TJH's predilections towards the FTSE350 as an investment universe, in the event of an extreme market crash/drawdown - think Japan's lost decade(s) - if you have

(1) Have enough capital to ride it out, and critically also
(2) Have the psychological disposition to do so

then 100% equities could be fine. Other than that

(3) Some have argued that c80% equities is optimal, so that drawdown's can be taken advantage of (not too far off Warren Buffet's 90-10 will instruction)
(4) Some have argued an age-based "lifestyle" approach is best, which for many will lead to something 60-40 like
(5) Some have said there is a risk (volatility) minimisation option of about 50-50
(6) Some suggest commodities and/or other alternatives need to be included
(7) etc

For me, mine is a compromise of (3), (4) & (5) above, in rough terms, assuming c80% equities at birth, c50% equities at 100 years old, pro-rated between (my actual percentages are 78 & 48). I'm not into alternatives but could make a case for commodities in lieu of some portion of the non-equity component (which is currently only bonds, bond-funds and cash).

I think International's musings and questions are reasonable.

Regards, Newroad