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Bond funds - advice and opinions sought

Gilts, bonds, and interest-bearing shares
EssDeeAitch
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Bond funds - advice and opinions sought

#206775

Postby EssDeeAitch » March 10th, 2019, 9:00 am

I have 75% of my investments in equities and 25% in bonds held in the funds shown in the table below; the Morningstar X-Ray gives the following data.

Bond Style
Low Short; 8%
Low Intermediate; 68%
Low Long; 24%
Effective Duration; 3.24
Effective Maturity (Y); 8.42
Average Credit Quality; B

I have read some really quite confusing things regards bonds including the terms "diversification, diworsification, inverted yield curve, susceptibility to interest rate growth" and I suspect many others that give me pause for thought and so I would like some opinion please on the wisdom or otherwise of investing in bond funds and then on the mix of bond chosen. I have specifically selected for income although at this stage, I have 100% re-investments I have no need to draw the income


Alaric
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Re: Bond funds - advice and opinions sought

#206779

Postby Alaric » March 10th, 2019, 9:23 am

EssDeeAitch wrote: I have specifically selected for income although at this stage, I have 100% re-investments I have no need to draw the income


What sort of returns are you getting, both in Income and Capital and how do these compare with the other 75%.

A premise of investing in Bond funds is that their capital value should be less volatile than shares. Probably the amount of income as well, as a cut in income from a Bond is a default and the managers will try to avoid these.

If interest rates on government borrowings ever return to the levels before 2008 of 3% to 4%, the capital values of bonds may take a hit.

EssDeeAitch
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Re: Bond funds - advice and opinions sought

#206782

Postby EssDeeAitch » March 10th, 2019, 9:34 am

Alaric wrote:
EssDeeAitch wrote: I have specifically selected for income although at this stage, I have 100% re-investments I have no need to draw the income


What sort of returns are you getting, both in Income and Capital and how do these compare with the other 75%.

A premise of investing in Bond funds is that their capital value should be less volatile than shares. Probably the amount of income as well, as a cut in income from a Bond is a default and the managers will try to avoid these.

If interest rates on government borrowings ever return to the levels before 2008 of 3% to 4%, the capital values of bonds may take a hit.


On performance I think it may be a bit too early to say as I have only been self investing since August last year but the forecast yield is 5.6% and so far, the capital value has remained constant whist the equities are showing a slight loss - so parity to all intents and purposes.

tjh290633
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Re: Bond funds - advice and opinions sought

#206820

Postby tjh290633 » March 10th, 2019, 12:29 pm

I have an aversion to fixed interest securities because of that word "fixed". Whether bond funds do any better, I have no idea, never having investigated them, but in the past the thoughts were always that it was better to hold them direct, rather than pay someone to do it for you.

Has it changed? Maybe if they are investing in the chancier side of bonds, it has.

TJH

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Re: Bond funds - advice and opinions sought

#206825

Postby Alaric » March 10th, 2019, 1:00 pm

tjh290633 wrote: but in the past the thoughts were always that it was better to hold them direct, rather than pay someone to do it for you.


Concentration of risk could be a problem. Perhaps you aren't getting so much with Corporate Bonds 4%-5% with limited prospect of capital gain that it compensates for the default risk. You have the same exposure to Company risk with individual equities but there the share price growth can be a handsome reward for the risk. So use a fund to spread the risk. You lose yield to charges of course.

Elsewhere on this site, people have written about the concept of a Bond ladder. You have about equal weights in, say, ten bonds of outstanding terms of one to ten years. Every year one matures and you use the proceeds to buy another with ten years to maturity.

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Re: Bond funds - advice and opinions sought

#206839

Postby tjh290633 » March 10th, 2019, 2:10 pm

Alaric wrote:
tjh290633 wrote: but in the past the thoughts were always that it was better to hold them direct, rather than pay someone to do it for you.


Concentration of risk could be a problem. Perhaps you aren't getting so much with Corporate Bonds 4%-5% with limited prospect of capital gain that it compensates for the default risk. You have the same exposure to Company risk with individual equities but there the share price growth can be a handsome reward for the risk. So use a fund to spread the risk. You lose yield to charges of course.

Elsewhere on this site, people have written about the concept of a Bond ladder. You have about equal weights in, say, ten bonds of outstanding terms of one to ten years. Every year one matures and you use the proceeds to buy another with ten years to maturity.

That was gilts, of course, before corporate bonds were readily available. I've been looking at a 5 year gilt ladder for some years now, and it has given negative returns.

Not exactly encouraging.

TJH

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Re: Bond funds - advice and opinions sought

#206865

Postby everhopeful » March 10th, 2019, 5:44 pm

There is surely no reason why a bond ladder can not use corporate bonds. I have a selection of individual bonds with different maturities which although not constructed as a ladder serves a similar function.
I hold individual bonds, Index linked bond ETFs, prefs and strategic bond funds in my fixed interest allocation. Having bought some time ago I have enjoyed capital appreciation with many of these but with regard to the original post I would be nervous with current valuations about buying anything much at the moment apart from strategic bond funds.

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Re: Bond funds - advice and opinions sought

#207177

Postby Backache » March 12th, 2019, 12:10 pm

EssDeeAitch wrote:I have 75% of my investments in equities and 25% in bonds held in the funds shown in the table below; the Morningstar X-Ray gives the following data.

Bond Style
Low Short; 8%
Low Intermediate; 68%
Low Long; 24%
Effective Duration; 3.24
Effective Maturity (Y); 8.42
Average Credit Quality; B

I have read some really quite confusing things regards bonds including the terms "diversification, diworsification, inverted yield curve, susceptibility to interest rate growth" and I suspect many others that give me pause for thought and so I would like some opinion please on the wisdom or otherwise of investing in bond funds and then on the mix of bond chosen. I have specifically selected for income although at this stage, I have 100% re-investments I have no need to draw the income


A couple of thoughts.
Firstly I don't really understand your bond table . It appears to add up to 43% which is neither the percentage of bonds in your portfolio nor is it 100%.

Secondly you have stated that you don't need the income. You have not stated why you want the bonds, what is the purpose?
Are you wanting bonds for derisking the portoflio? ie making the capital more stable or do you want the income at a later stage?

Third How are you holding them? is it a taxable holding because if so the yield to you may be less depending on your personal tax circumstances.

FWIW and it probably isn't worth much without a knowledge of why you hold it my own preference would be for lower yielding higher grade possibly shorter duration bond fund if I had a substantial equity portfolio and I was holding it for derisking.
The yield means that the quality of bond is likely to be low which means they may fall in concert with equities.

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Re: Bond funds - advice and opinions sought

#207192

Postby EssDeeAitch » March 12th, 2019, 1:25 pm

Backache wrote:A couple of thoughts.
Firstly I don't really understand your bond table . It appears to add up to 43% which is neither the percentage of bonds in your portfolio nor is it 100%.

Secondly you have stated that you don't need the income. You have not stated why you want the bonds, what is the purpose?
Are you wanting bonds for derisking the portoflio? ie making the capital more stable or do you want the income at a later stage?

Third How are you holding them? is it a taxable holding because if so the yield to you may be less depending on your personal tax circumstances.

FWIW and it probably isn't worth much without a knowledge of why you hold it my own preference would be for lower yielding higher grade possibly shorter duration bond fund if I had a substantial equity portfolio and I was holding it for derisking.
The yield means that the quality of bond is likely to be low which means they may fall in concert with equities.


Thanks for your response, let me answer your questions:

Bonds form 25% of my total investments and the funds listed are held within my SIPP and constitute 43% of those investments (I should have made that clear). No bonds in ISA or Trading accounts

I don't need the income for monthly living expenses, the intention is to allocate the income to further purchases of bonds and/or equities on a quarterly basis and yes, the purpose of bonds is to "derisk" and diversify. Some of the bonds are legacy investments carried over from the days when the investments were managed by an IFA.

The bond quality is an issue but to be honest, although I have done a lot of sifting, I have not really found much that is lower risk so if you can point me towards any it would be appreciated.

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Re: Bond funds - advice and opinions sought

#207246

Postby Backache » March 12th, 2019, 5:23 pm

EssDeeAitch wrote:

The bond quality is an issue but to be honest, although I have done a lot of sifting, I have not really found much that is lower risk so if you can point me towards any it would be appreciated.


Vanguard do a series of bond funds which have higher credit quality and or lower duration as you choose.
https://www.vanguardinvestor.co.uk/what ... e-products
The yields are not going to excite too much but as a counterweight to an equity based portfolio they should be much less correlated than one with lower quality bonds.

EssDeeAitch
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Re: Bond funds - advice and opinions sought

#207369

Postby EssDeeAitch » March 13th, 2019, 9:49 am

Backache wrote:
EssDeeAitch wrote:

The bond quality is an issue but to be honest, although I have done a lot of sifting, I have not really found much that is lower risk so if you can point me towards any it would be appreciated.


Vanguard do a series of bond funds which have higher credit quality and or lower duration as you choose.
https://www.vanguardinvestor.co.uk/what ... e-products
The yields are not going to excite too much but as a counterweight to an equity based portfolio they should be much less correlated than one with lower quality bonds.


Thanks indeed, they are worth looking at and it may be prudent to swap some of the higher risk bonds out.


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