The Lemon Fool

Here is an interesting article from Vanguard:

https://advisors.vanguard.com/iwe/pdf/ISGGLBD.pdf

Figure 13 is particularly interesting. For a UK investor, using 100% hedged global bonds in a 60% global equity / 40% bond portfolio shaved about 2% off the portfolio volatility, relative to using 100% GBP bonds. The volatility reduction was roughly proportional to the percentage allocation of global bonds relative to local bonds.

Hi
Been using Vanguard Global Bond (Index Tracker)Hedged for my Bond component of my Portfolio for 9 years
Av return 4.3% pa
Seems logical to have Global Bonds with Global Equities
A hedged Fund for Vanguard made it possible
Makes for a cheap functional Portfolio for someone not wanting to spend their waking hours worrying!
Now if they could combine them into one fund!!!
xxd09

I do not expect that combining a global equity tracker and global bond tracker into one fund would be worth the extra layer of costs. The next level of complexity is to add some UK bias to the equities (Vanguard currently uses 25% UK), and some index linked gilts to the bond component (Vanguard uses 25% IL for the Target Retirement Funds at age >75). Lifestrategy includes more refinements to justify the cost. Nonetheless, a global equity tracker combined and global bond tracker is perfectly reasonable approach. Adding some extra complexity may boost the risk adjusted return a little, but there are diminishing returns here.

I tend towards a US bias in my Portfolio because it is the most successful economy
A UK bias in Equities as the Lifestrategy Funds have goes against this desire
I think Vanguard are reducing the U.K. bias in these funds so going in my direction
I might use them any way for simplicity as old age sets in-having one fund to deal with has a strong appeal!
xxd09

The US market is also the most expensive. I do not believe that I know more than Mr Market here, or Vanguard for that matter. The reason for some UK bias is to reduce portfolio volatility, and take advantage of the more favourable tax treatment of UK shares. Vanguard has reduced its UK allocation from 30% to 25% since they launched Lifestrategy in the UK seven years ago.

One point not mentioned... the cost of hedging currency risk is likely to rise in future as changes to bank capital rules heavily penalise the currency hedges which these funds do. That cost will be passed on by the banks.

Agree with all the points from the two previous posters
I have to balance their valid points with wanting a strong US market access especially as we sail into Brexit waters
ie 50% of the Equities and Bonds in my Portfolio will be US denominated
The most successful economy in the world is what I am betting on!
xxd09

The most successful economy in the world is what I am betting on!

since 1900 Australia ( tied with South Africa ) has had the best performing stock market, apparently. But then maybe that was because economic growth and stock market returns are not 100 % correlated. If a market is cheap enough then investors can get returns to compensate for a lower level of growth.

Yes you cannot corelate that with every market has its own dynamics to play. Its the cost of risk and past performance that decides the most

It looks as if Vanguard are trying to sell more bond funds by allaying the fears of the average investor. Bond values will continue to fall as interest rates rise. Hedging currency risk is in my opinion a gimmick to prop up the value of their funds and Vanguard's revenues.

When Warren Buffett says that bonds are particularly poor value at the moment, why buy?

LooseCannon101 wrote:It looks as if Vanguard are trying to sell more bond funds by allaying the fears of the average investor.

If you buy individual bonds as opposed to funds of bonds and then hold them to maturity, you don't have any volatility risk.

LooseCannon101 wrote:When Warren Buffett says that bonds are particularly poor value at the moment, why buy?

Why buy equities when they are particularly poor value too? You have to put your money somewhere. Mr Market knows more than Mr Buffet, and he has beaten him over the last ten years too.

GeoffF100 wrote:Why buy equities when they are particularly poor value too?

If you are investing for income, with Bonds you currently have the certainty of a low income for almost ever. With equities you have the greater risk of a capital or income loss, but also the possibility of both increasing, in some cases dramatically.

Alaric wrote:

GeoffF100 wrote:Why buy equities when they are particularly poor value too?

If you are investing for income, with Bonds you currently have the certainty of a low income for almost ever. With equities you have the greater risk of a capital or income loss, but also the possibility of both increasing, in some cases dramatically.

Nonetheless, taking risk into account, the market believes that the relative pricing of equities and bonds is right. However, the market may be more or less risk averse than you or I.

It might be of interest that the Vanguard Global Bond Index Fund (hedged to the pound) has generated an average result of 4.4% pa since inception of the Fund 9 years ago
That will do for me re the Bond portion of my Portfolio
xxd09

Alaric states
If you are investing for income, with Bonds you currently have the certainty of a low income for almost ever. With equities you have the greater risk of a capital or income loss, but also the possibility of both increasing, in some cases dramatically.

It may seem like forever but it is not ! Depending on the bond fund/ETF tracker the duration is the key. E.G. Vanguard US Treasury ETF has a duration of six years, bonds mature constantly and new purchases are made. After one year, the one year bond matures, the 5 year bond becomes a 4 year bond etc.

If interest rates rise you will reinvest in fresh , higher yielding longer bonds, in addition with short rates typically lower than long rates you get a boost in the price of your bonds. A 4 year bond costs more than a 5 year bond with the same coupon. For the US bonds 6 years duration is not that long, of course some funds/indices have durations markedly longer/shorter than my example.

Given I hold far more equities than bonds I am sympathetic to your point of view but bonds can have a place. Personally I don’t hold hedged bonds as I am happy to hold dollar bonds as a balance to dollar equities, I have a view on the relative attractions of the dollar and pound and finally some of my costs are dollar linked and thus the dollar exposures are valuable.

A mix of both bonds and equities makes more sense to me than just one or the other, even if the ratio in my case is 15+:1 but this is only because I have an absolute target for bonds/cash and the balance is almost entirely equities.