Which bond fund(s) to buy?

[Blagdon]

I am 60 and moving from semi-retirement into full retirement. Historically I have held very few if any bonds - nearly all equities. I have now started to buy a few bonds - a bit into a global aggregate bond tracker with no hedging and a bit into a handful of Prefs. I now have the option to buy some cheap bond trackers, but not sure which to go for...
* Corporate Bond All Stocks Index Tracker
* Over 15 Year Corporate Bond Index Tracker
* Over 5 year Index-Linked Gilt Index Tracker
* Over 15 Year Gilt Index Tracker
I would be grateful for any thoughts/suggestions.

[tjh290633]

My immediate thought is don't do it.

I have been retired for 25 years now and stayed in 100% equities. Initially like you I contemplated a partial move into fixed interest bonds, but I could not get any improvement over what I was getting from shares, and I would lose the prospect of an increasing income.

I have never regretted the choice. I could diversify into investment trusts to reduce the management needed, but do not feel the need to do that.

TJH

[Blagdon]

I don't have any final salary or annuity type pension and have historically kept equities to a maximum of 75%, but my 25% non-equity includes infrastructure type funds that some would say are equityish as gold/cash etc. I am looking at less than 10% bonds in total. Reducing equity to say 70%.

[kempiejon]

I am mostly equities but do have a bit of FI and a corp bond fund and a cash slug in premium bonds. As my net worth increase my %age cash/FI/bond has been falling though the absolute value has crept up a bit. That's changing as I am planning on extracting 25% from my SIPP sooner or later so have been accumulating cash and some short term FI bits in there so I should have a known amount ready after Christmas.

[JohnW]

I now have the option to buy some cheap bond trackers, but not sure which to go for

If you can identify what you want out of a bond fund(s) from the investing position and personal circumstances you're in, then I think you can narrow it down. What are the priorities for what you want from a bond fund?

[Blagdon]

My primary objective is diversification from equities. I have stuck to a pretty hard rule of 75% of my assets (excluding house) in equities (mainly trackers). The difficult part is the 25% non-equity - currently it is only 24%...
* 14% cash - I think this should be lower
* 6% alternative (gold and infrastructure)
* 4% bonds - I think this should be a bit higher

Currently my 4% bonds are...
* Global aggregate bond ETF = 1.5%
* Lend invest due to mature October = 1%
* Prefs = 2%

I am fortunate that I can withstand a fair amount of risk and I am not concerned about volatility.

[Blagdon]

Just realised that that was a long winded way of saying that I want to maximise total return and I am happy accepting risk and volatility.

[JohnW]

My primary objective is diversification from equities.

That means no corporate bonds,surely, since there is a whiff of ‘equity-ness’ with them. If you wanted the promise of corporate bond returns over government bond returns, and happy with the risk, wouldn’t you just increase your equity holding?
If so, we’re down to government bonds. What’s your next priority, as this might direct you towards long or short duration of nominal or inflation linked bonds.
Finally, if you’re having only 4% of the portfolio as bonds, does it really matter what you choose? The whole portfolio’s risk and return is going to be so dominated by the other 85%.

[NotSure]

....

Currently my 4% bonds are...
* Global aggregate bond ETF = 1.5%
* Lend invest due to mature October = 1%
* Prefs = 2%

Is that iShares or Vanguard ETF (or something else). There looks to be a big difference between the two I mentioned, with iShares being 50% cash?

[Blagdon]

It is actually the SPDR ETF GLBL - Global Aggregate Bond Unhedged

[Blagdon]

I would like to increase the Bond component to say 10-15%. To be honest the only reason I have alternative investments (infrastructure & gold) is because Bonds have always looked poor value to me. Though I could say the similar about gold. However, Bonds look better value now and I still have the nagging doubt that I should have more in Bonds. I understand and like equity, but I don't want to go over 75% weighting. Even those who claim to be 100% equity usually have another source of income like a company pension - so to my mind not really 100% equity.

[daveh]

What about one of the bond ITs? NYCF, SMIF, BIPS etc. They have a good yield and are at a discount or at worst small premium to NAV at the moment, and are likely to perform well when the interest rate starts to fall. Now could be a very good time to buy.

[hiriskpaul]

Just realised that that was a long winded way of saying that I want to maximise total return and I am happy accepting risk and volatility.

Volatility is all very well if you are not drawing an income from your portfolio. If you are it can really matter. What proportion of your portfolio are you intending to draw each year when fully retired?

One thing you might want to think about is having a ladder of gilts and/or cash deposits that bridges the gap up to your state pension and any DB pensions.

[JohnW]

‘Bond prices go up and down primarily in response to two factors: changes in interest rates and changes in credit quality.’ Annette Thau, The Bond Book, p25. You can largely put aside ‘credit quality’ if you choose government bonds of a decent government(s). You manage interest rate risk by choosing the correct duration; the shorter the duration, the less the risk, and usually the lower the return. To optimise interest rate risk and return you match the duration of the bonds with the duration of your spending (of the bond money). Currency exchange rate changes can swamp bond returns; think carefully before going for unhedged foreign bonds.
Nominal bonds return your money later but inflation might have changed the usefulness of that money. Get inflation linked bonds if that worries you.

[richfool]

What about one of the bond ITs? NYCF, SMIF, BIPS etc. They have a good yield and are at a discount or at worst small premium to NAV at the moment, and are likely to perform well when the interest rate starts to fall. Now could be a very good time to buy.

Yes, that is my question too. As a holder of NCYF, bought late last year at a yield of 9+% (and now at a loss of c 14%), but offering a yield of 10+% (and at a discount), I was thinking about topping up. We must be getting near the top with interest rates (a max of one or two more increases), before the outlook for interest rates starts to look downwards. So why not buy/top up?

[CliffEdge]

NCYF seems to have plummeted in the last three months. Can it solely be because of interest rate rises or is something else going on?

[Redhill]

NCYF seems to have plummeted in the last three months. Can it solely be because of interest rate rises or is something else going on?

NCYF has been paying an uncovered dividend for several (I think) quarters although they have said they expect the divi to be covered in the near future, plus the sp was at a premium to NAV until recently.

I have held NCYF for several years, buying some initially at 38p in March 2020 when Covid hit the market values, and am happy to hold for longer term. At a yield of >10%, part of that yield is effectively repayment of capital while divi is uncovered but I'm OK with that as the spread of assets seems satisfactory.