The Lemon Fool

hiriskpaul wrote:No, you have to consider capital losses as well as non-payment of coupons. Default on 1 bond in 100 could potentially mean a 1% loss on the portfolio. Not all defaults will result in a total wipeout of course, but often bondholders will not recover all their capital.

Ok, I was under the impression that the bonds would be held till maturity. I guess you are saying sometimes the fund flogs them at a loss to repurchase others...........ahh! or maybe you are saying that when some bonds mature it might be tricky to replace them with others at a suitable price to maintain yields?

hiriskpaul wrote:Running yields are not a very useful concept by the way. For bonds yield to maturity is better. Running yield on Coop group 11% 2025 is 8.5%, but yield to maturity is only 6%. The yield to maturity is better as it takes into account the 30p per bond capital loss from now to maturity.

Thanks Paul, don't worry, I'm ok with the differences between RY and YTM. But thanks anyway.

Alaric wrote:The risk is to capital value as well as default or partial default, so that a bond with a 6% redemption yield widens out to a 10% yield. How much that writes down the capital value would depend on the outstanding term to maturity.

I don't understand this bit Alaric, I'm afraid.

GeoffF100 wrote:In the very long run, one would not expect the return from high yield (AKA junk) bonds to fall all the way down to those of investment grade bonds. We would expect there to be some residual long term reward for holding these bonds. The reason is that they have an unattractive risk/reward profile. Investment grade bonds are likely to deliver a reliable return come what may, except in the most dire of circumstances. Junk bonds give good returns in the good times, but terrible returns in the bad times, just when you can least afford to take the hit. You cannot predict in advance whether times will be better or worse than the degree of badness that is already priced into the bonds.

Yes, this is good food for thought. What's kind of occurred to me is that, if a junk bond loses (by way of defaults) a sizeable % of the holdings it's obv. got less capital to rebuild itself back up when times improve.

Melanie wrote:I don't understand this bit Alaric, I'm afraid.

If you have a "junk bond" with a coupon of 6% and a yield of 6%, the price is going to be around 100. If investors now demand a yield of 10%, the price is going to drop, and how far will depend on the outstanding term.

The point is that the risk to capital in a fund of junk bonds is not necessarily the risk that they will actually default. It's also that "the market" will believe the risk of default has increased and require a higher yield. Over time, the market may believe the risk of default has receded and then prices will recover.

Alaric wrote:

Melanie wrote:I don't understand this bit Alaric, I'm afraid.

If you have a "junk bond" with a coupon of 6% and a yield of 6%, the price is going to be around 100. If investors now demand a yield of 10%, the price is going to drop, and how far will depend on the outstanding term.

The point is that the risk to capital in a fund of junk bonds is not necessarily the risk that they will actually default. It's also that "the market" will believe the risk of default has increased and require a higher yield. Over time, the market may believe the risk of default has receded and then prices will recover.

A ha! Now that is an interesting point. Thank you - I'd not really considered that one.

At times of crisis with High Yield Bonds there will be a number of things going on.

Bonds may default on interest payments but resume later on, they may default completely. During the crisis the market price may fall significantly and the yield may well rise significantly (despite falling interest payments) and a lack of liquidity becomes a major issue.

An ETF of High Yield Bonds may in good times have good liquidity but if the underlying assets have poor liquidity then it's likely the ETF will suffer liquidity issues in a crisis.

I watched Investment Trusts of High Yielding bonds from the sidelines in 2008-2009 and there were increased discounts, falling dividends and share prices but they largely recovered in due course.

Hariseldon58 wrote:At times of crisis with High Yield Bonds there will be a number of things going on.

Bonds may default on interest payments but resume later on, they may default completely. During the crisis the market price may fall significantly and the yield may well rise significantly (despite falling interest payments) and a lack of liquidity becomes a major issue.

An ETF of High Yield Bonds may in good times have good liquidity but if the underlying assets have poor liquidity then it's likely the ETF will suffer liquidity issues in a crisis.

I watched Investment Trusts of High Yielding bonds from the sidelines in 2008-2009 and there were increased discounts, falling dividends and share prices but they largely recovered in due course.

Which makes me wonder if for a long term investment (15-25years) I'm better off purchasing these:

https://www.hl.co.uk/funds/fund-discoun ... cumulation
(despite higher charge and greater risk)

compared to these:
https://www.hl.co.uk/funds/fund-discoun ... cumulation
(lower charge and risk)

Dunno really. Have only been investing since March of this year, so zero experience of long term performance of these things.

@TheMotorcycleBoy

I admire your enthusiasm, you have posted on the board Company Analysis for research on individual companies and clearly are interested in a wide range of investments. Investing is an interesting topic and the tendency is to get stuck in when you start but......

You state you are investing for 15 to 25 years, you have plenty of time I'd start slowly, read lots of books, blogs etc.

If you want to invest in Equities then perhaps invest on a monthly contribution into some thing like a Vanguard Life Strategy fund, a Vanguard All World ETF or a broad generalist investment trust like Foreign and Colonial.

If you want a more active approach then take a look at the John Baron portfolios, you can sign up for a free weeks trial, he has a number of portfolios that are broadly aimed at different age ranges, stages of investment life. Interesting commentary and thoughts.

I find investing interesting and you want to do something but you don't have to ! My investing very satisfactory from a performance perspective over the last 28 years and a fair bit of work, I started with a small collection of investment trusts and if I had simply stuck with those, over that a period the results would have just fine too !

You don't need to work too hard and there is a real danger that you tinker too much and end up doing much worse than if you had done nothing at all.

In 1990 the whole process of getting information and trading was much slower and lessened the likelihood of over trading and over diversifying, the temptation of having low cost dealing and a huge amount of information available is to feel you must do something, it's often self defeating.

Hariseldon58 wrote:@TheMotorcycleBoy

I admire your enthusiasm, you have posted on the board Company Analysis for research on individual companies and clearly are interested in a wide range of investments. Investing is an interesting topic and the tendency is to get stuck in when you start but......

You state you are investing for 15 to 25 years, you have plenty of time I'd start slowly, read lots of books, blogs etc.

If you want to invest in Equities then perhaps invest on a monthly contribution into some thing like a Vanguard Life Strategy fund, a Vanguard All World ETF or a broad generalist investment trust like Foreign and Colonial.

If you want a more active approach then take a look at the John Baron portfolios, you can sign up for a free weeks trial, he has a number of portfolios that are broadly aimed at different age ranges, stages of investment life. Interesting commentary and thoughts.

I find investing interesting and you want to do something but you don't have to ! My investing very satisfactory from a performance perspective over the last 28 years and a fair bit of work, I started with a small collection of investment trusts and if I had simply stuck with those, over that a period the results would have just fine too !

You don't need to work too hard and there is a real danger that you tinker too much and end up doing much worse than if you had done nothing at all.

In 1990 the whole process of getting information and trading was much slower and lessened the likelihood of over trading and over diversifying, the temptation of having low cost dealing and a huge amount of information available is to feel you must do something, it's often self defeating.

Many thanks for this. Since a lot of your post is not necessarily about fund charges and that bond fund, and mine won't be either - I'll PM you with a proper reply.