How to increase defensiveness of IT portfolio

[richfool]

Further to the above thread, would anyone suggest any bond funds to increase defensiveness?

I am aware that the likes of PNL and CGT would give some exposure, albeit at a price. Another option, after watching Monabri's suggested Vanguard video, could be an ETF such as VIGBBD, IGLH or VGOV.

I use SLXX, a corporate bond etf yielding around 3%. In response to my annual review Hariseldon suggested the etf IS15. I think it’s shorter dated and slightly lower yielding, but could suit your needs based on your objective in this thread.

Regards

Thanks for those suggestions, which I will research. What about VGOV, - being a Government bond fund, would that be at the safest end of the scale?

[Wasron]

VGOV isn’t one i’m familiar with. ETFs aren’t generally my thing to be honest. I enjoy stock picking, but trust most of my money to IT managers.

After having a quick look, VGOV looks like it has very low volatility, like IS15

[monabri]

Further to the above thread, would anyone suggest any bond funds to increase defensiveness?

I am aware that the likes of PNL and CGT would give some exposure, albeit at a price. Another option, after watching Monabri's suggested Vanguard video, could be an ETF such as VIGBBD, IGLH or VGOV.

I use SLXX, a corporate bond etf yielding around 3%. In response to my annual review Hariseldon suggested the etf IS15. I think it’s shorter dated and slightly lower yielding, but could suit your needs based on your objective in this thread.

Regards

Thanks for those suggestions, which I will research. What about VGOV, - being a Government bond fund, would that be at the safest end of the scale?

Download the free book...! (a link to a download e-book by the Pensioncraft people)

https://pensioncraft.com/register/inves ... bond-fund/

[Hariseldon58]

VGOV isn’t one i’m familiar with. ETFs aren’t generally my thing to be honest. I enjoy stock picking, but trust most of my money to IT managers.

After having a quick look, VGOV looks like it has very low volatility, like IS15

VGOV is a collection of UK Government bonds with a fairly low yield to maturity of around 1.3%, is has an average maturity of 18* years and a duration of 12.9 years.
With such a long duration it may be very volatile IF interest rates change.

If interest rates rise by 1% then prices will fall by around 13%, the credit quality is high, ie the UK Government but it’s a long time to be tied into a 1.3% yield. Conversely if interest rates fall it will rise in price.

Contrast that with sterling corporate bond ETFs IS15 and SLXX. They have lower credit quality and shorter durations of 2.5 and 8.5 years respectively and yields to maturity of 1.9% and 2.5% respectively.

They have less interest rate risk than VGOV and IS15 substantially less risk than SLXX.

Whilst they are Investment grade bonds they will have lower credit quality than VGOV , you can expect IS15 to have less credit risk than SLXX ( less time you hold a bond, the less time it has to go bad!)

I would not bet on low volatility from VGOV but there are low duration GILT ETFs from iShares ERNS and also Lyxor.

This is a link to duration, bonds are fairly predictable but can be a little complex. (There are various definitions of duration but this is the crux of the concept)
https://www.investopedia.com/terms/m/modifiedduration.asp

[richfool]

VGOV isn’t one i’m familiar with. ETFs aren’t generally my thing to be honest. I enjoy stock picking, but trust most of my money to IT managers.

After having a quick look, VGOV looks like it has very low volatility, like IS15

VGOV is a collection of UK Government bonds with a fairly low yield to maturity of around 1.3%, is has an average maturity of 18* years and a duration of 12.9 years.
With such a long duration it may be very volatile IF interest rates change.

If interest rates rise by 1% then prices will fall by around 13%, the credit quality is high, ie the UK Government but it’s a long time to be tied into a 1.3% yield. Conversely if interest rates fall it will rise in price.

Contrast that with sterling corporate bond ETFs IS15 and SLXX. They have lower credit quality and shorter durations of 2.5 and 8.5 years respectively and yields to maturity of 1.9% and 2.5% respectively.

They have less interest rate risk than VGOV and IS15 substantially less risk than SLXX.

Whilst they are Investment grade bonds they will have lower credit quality than VGOV , you can expect IS15 to have less credit risk than SLXX ( less time you hold a bond, the less time it has to go bad!)

I would not bet on low volatility from VGOV but there are low duration GILT ETFs from iShares ERNS and also Lyxor.

This is a link to duration, bonds are fairly predictable but can be a little complex. (There are various definitions of duration but this is the crux of the concept)
https://www.investopedia.com/terms/m/modifiedduration.asp

Thank you both for your input. I will study those over the next couple of days.

Ironically, it looks like I may have missed the boat for anticipating the next correction, with today's falls in equities and rise in bonds! Accepted it could just be another bump in the road.

My most susceptible equity IT's last time round were: ASEI (UK G&I) and MRC (Mercantile - UK Mid Caps). The latter won't have been helped by the ongoing Brexit uncertainty. I had been holding onto them hoping for a bounce once Brexit was resolved, but that could still be some way away.. So MRC could be one to ditch if I want to reduce the equity risk (MRC has a lower yield c 3%).

I think I shall sit on cash for a while.

[PrefInvestor]

Hi richfool, Well as far as I can see you don’t seem to have any debt or fixed income type assets in your portfolio at the moment ?. To be more defensive I think that you need to invest in things that are less directly correlated to the equity markets.

So things like preference shares (AV.A, AV.B, GACA., GACB, LLPC, NWBD, BWSA, RAVP……) which 6%+ yields and mostly ignore equity price movements – you DO have MCT I see but that’s a bit of a special case I think and more equity correlated ?. I see that you do have SHRS which is invested in prefs.

And debt / fixed interest trusts eg NCYF, SMIF, RECI, SEQI, SWEF and their like.

You could also consider corporate bond funds/ETFs of which there are many.

You have gold which is always consider the ultimate defensive I see.

Obviously there are risks with all these things, but as usual when investing diversity is usually a good thing and some exposure to these kinds of assets does definitely add stability to your portfolio I have found.

Just thought that you might care to take a look at them anyway…..

ATB

Pref

[richfool]

Hi richfool, Well as far as I can see you don’t seem to have any debt or fixed income type assets in your portfolio at the moment ?. To be more defensive I think that you need to invest in things that are less directly correlated to the equity markets.

So things like preference shares (AV.A, AV.B, GACA., GACB, LLPC, NWBD, BWSA, RAVP……) which 6%+ yields and mostly ignore equity price movements – you DO have MCT I see but that’s a bit of a special case I think and more equity correlated ?. I see that you do have SHRS which is invested in prefs.

And debt / fixed interest trusts eg NCYF, SMIF, RECI, SEQI, SWEF and their like.

You could also consider corporate bond funds/ETFs of which there are many.

You have gold which is always consider the ultimate defensive I see.

Obviously there are risks with all these things, but as usual when investing diversity is usually a good thing and some exposure to these kinds of assets does definitely add stability to your portfolio I have found.

Just thought that you might care to take a look at them anyway…..

ATB

Pref

Thank you for your thoughts PrefInvestor.

I do hold several REIT's and GCP & INPP in the infrastructure sector. Your comments noted re my holdings of SHRS and MCT.

SIGT which I hold includes a holding in the Royal London Short Duration Global High Yield Bond Fund, and in SMIF.

I have had a look at and am drawn towards: CMHY or NCYF in the UK high income sector (NCYF is on a high premium of +8.7%, whereas CMHY is on a discount of -1.3%), AND also IPE in the Global high Income sector (Yield: 6.95% Premium: +0.2%). All three are Jersey domiciled. Currently, I favour IPE.

Any views on those three?

[PrefInvestor]

I have had a look at and am drawn towards: CMHY or NCYF

Any views on those three?

Hi Again RichFool, Well I am likely biased as I hold NCYF and dont hold either of the other two. There was a big hiatus over IPE not long ago as it somehow managed to lose its fund managers for a while (!) and lost its way. CMHY was recommended as a replacement at the time.

I found this link which talks about these two ITs:-

https://www.investorschronicle.co.uk/fu ... me-option/

Of the two, given the history, CMHY looks less risky to me (and yield on IPE looks too high to be comfortable....but you might like that ?) but you should read the article and decide for yourself. Some other alternatives are listed at the end as well which might also bear investigation.

ATB

Pref

[PrefInvestor]

Hi Again RichFool, I think I may have misread your last message and thought that you were primarily considering IPE or CMHY, sorry about that.

Regarding NCYF I have held it for about a year and am pretty happy with it, am up about 5% in total return terms. Yield is high and pays quarterly dividends which I like and reviews that I’ve seen are generally positive, eg see below:-

https://quoteddata.com/research/cqs-cit ... ators-sky/

So personally I would be a bit worried by IPE because of the history there, but they all look like viable options.

ATB

Pref

[richfool]

Hi Again RichFool, I think I may have misread your last message and thought that you were primarily considering IPE or CMHY, sorry about that.

Regarding NCYF I have held it for about a year and am pretty happy with it, am up about 5% in total return terms. Yield is high and pays quarterly dividends which I like and reviews that I’ve seen are generally positive, eg see below:-

https://quoteddata.com/research/cqs-cit ... ators-sky/

So personally I would be a bit worried by IPE because of the history there, but they all look like viable options.

ATB

Pref

I did look at the UK and Global High Income sectors a couple of years back, which seem to be a mix of various grades of corporate bonds, including some higher risk ones. I have re-visited them today, but still come back to the thinking that they tend to be riskier, bearing in mind I am looking to increase the defensiveness of my portfolio. For much the reasons you mention I feel I should rule out IPE, NCYF and probably CMHY too. I did also look at HDIV.

I do remember the IPE management disagreement and noted the not insignificant fees.

Bearing in mind I am looking for a defensive product (pigeon hole), almost an alternative to cash, or indeed as an addition to cash and gold positions, I am wondering whether either VIGBBD (Bloomberg Global Bonds ETF- $ unhedged) or IGLH Global (Gov) Bonds ETF- hedged). The latter might be preferable as it is hedged back to sterling.

These are a couple of links to the relevant products.

IGLH:
https://www.ishares.com/uk/individual/e ... rough=true

https://www.blackrock.com/uk/individual ... rough=true

http://www.morningstar.co.uk/uk/etf/sna ... entType=FE

VIGBBD
https://www.vanguardinvestments.dk/port ... /?overview

I may need to read monabri's recommended PensionCraft book before finalising my thinking.

[PrefInvestor]

Well RichFool, if you are wanting to be “super safe” then you can get a 5 year fixed rate term savings account paying 2.5% pa, which might be as good as some of the things that you’ve listed in your last post which have very low yields…..?

https://www.moneysavingexpert.com/savin ... -interest/

Taxable obviously though.....

ATB

Pref

[richfool]

For anyone still interested, I have been giving this further thought and research. Taking into account the latest warnings from Pimco about bonds, (and my limited knowledge about bonds), I have been looking at other possible defensive products.

One possibility could be a defensive trust like CGT (Capital Gearing Trust) which invests very defensively and holds Government Bonds and US TIPS. Though as it is at a premium of 3.5% and only yields 0.48% it strikes me as an expensive form of protection with little return along the way.

Noting that my (IT) portfolio is fairly well diversified already, and has some bond exposure through Shires, MYI, SIGT and MATE, plus some preference shares through MCT and a small amount of gold (SGLN), I think I will stick with that and supplement it with cash which I can accumulate by not reinvesting dividends for a period.

Against that background, in my separate share dealing account (where I hold a few direct stocks), I sold HSBC to reduce my overweight(ness) in financials, and split the proceeds between MYI and BMPI which should increase diversification and reduce risk there.

So now I just have to sit on my hands and resist the temptation to tinker.

[TUK020]

So now I just have to sit on my hands and resist the temptation to tinker.

and that's the hard bit

[gbjbaanb]

A defensive trust like CGT won't protect you from fall, it'll just reduce the damage. See its performance and note that some years it has dropped down.

If you look at something like Merril Lynch's investment clock, you'll see that sectors like utilities, pharma and consumer staples are suggested as doing well in times of turmoil. So buy those instead of trying to bond your way through. I think bonds are no longer the defensive thing they once were simply because of QE causing them to behave more like equities.

So now buy more utilities, and wait for the recession to bite. When the recession is is full swing, shift them into "growth stocks" (eg financials) as they'll be bombed out but do well as the economy recovers. Also buy pharma and consumer staples and keep them through the recession.

I'd still buy a defensive trust, but woudl prefer CGT to Brunner as it seems less volatile. Brunner has done better overall, but not when things went badly (eg 2015/16 it fell 6% v CGTs 1.5% drop)

[richfool]

A defensive trust like CGT won't protect you from fall, it'll just reduce the damage. See its performance and note that some years it has dropped down.

If you look at something like Merril Lynch's investment clock, you'll see that sectors like utilities, pharma and consumer staples are suggested as doing well in times of turmoil. So buy those instead of trying to bond your way through. I think bonds are no longer the defensive thing they once were simply because of QE causing them to behave more like equities.

So now buy more utilities, and wait for the recession to bite. When the recession is is full swing, shift them into "growth stocks" (eg financials) as they'll be bombed out but do well as the economy recovers. Also buy pharma and consumer staples and keep them through the recession.

I'd still buy a defensive trust, but woudl prefer CGT to Brunner as it seems less volatile. Brunner has done better overall, but not when things went badly (eg 2015/16 it fell 6% v CGTs 1.5% drop)

Thanks for your thoughts gbjbaanb.

Agreed re utilities, consumer staples and pharmas.

As you will see from my portfolio listing, I do already hold:-

Utilities - EGL (Ecofin Global Utilities), which ironically I topped up today. (and NG in my separate stocks portfolio)
Pharma's - GSK (Glaxo) and WWH (Worldwide Healthcare), plus BMPI has some biotech stocks.
Consumer Staples, - I hold FGT along with other UK G&I trusts which have a good helping of the likes of Unilever, (which I also hold (ULVR) in my separate stocks portfolio).

MATE, BMPI & SIGT are all in the multi-asset sector, and thus between them do hold other assets classes including some Bonds, Fixed interest and Infrastructure and have mandates that are intended to be more defensive and less volatile.

MYI and Shires also hold some fixed interest.

Infrastructure - INPP & GCP.
Renewables - JLEN & TRIG.

My gold ETF did well today.

[Gadgeisbackagain]

https://monevator.com/9-lazy-portfolios ... tors-2010/
Some interesting ideas there on defensive portfolios.

My thoughts:

What you seek, does not exist. You want Gilts but when they were actually defensive and not hugely overvalued as they are now, so inherently risky. You don't like Corporate Bonds which are the nearest alternative. You probably don't want cash either due to the low returns.

Everybody seeks what you want. Some means of reducing their risk profile to equities that also pays a great yield.
There is no such animal, although in my view Gilts in emerging markets comes close and high yield corporate bond ITs may not be as high risk as you think.

I would question why you are so overweight to the UK?
It is only 7% of the global stock market yet you have more than that in just two stocks, let alone the ITs.
That is fine if you believe that the UK is undervalued and will recover soon but do you?
If you really do, then think about IVI which offer great shares and an amazing discount on the underlying assets today.

You seem massively underweight the best market in the world, The USA.
That has demonstrably cost you dearly in the last year.

I think the best investment decision that I have made in years was to sell almost everything in the UK (except FGT) and invest instead in USA / Global shares directly, or via ITs like Fundsmith and Lindsell Train.

I now find myself looking at UK shares like Leg & Gen, comparing them with Paypal, for example, and find it incredible that I ever found the UK shares interesting as business propositions.

Would you sooner own:

Paypal
Microsoft
Disney
Nestle
LVMH

Or

Vod
GSK
BATS
etc

One last point, CGT is also available now as a fund which would avoid the premium on the IT.
Don't buy it somewhere like HL though or their .45% platform charge will defeat the whole thing.

Gadge

[richfool]

https://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/
Some interesting ideas there on defensive portfolios.

My thoughts:

What you seek, does not exist. You want Gilts but when they were actually defensive and not hugely overvalued as they are now, so inherently risky. You don't like Corporate Bonds which are the nearest alternative. You probably don't want cash either due to the low returns.

Everybody seeks what you want. Some means of reducing their risk profile to equities that also pays a great yield.
There is no such animal, although in my view Gilts in emerging markets comes close and high yield corporate bond ITs may not be as high risk as you think.

I would question why you are so overweight to the UK?
It is only 7% of the global stock market yet you have more than that in just two stocks, let alone the ITs.
That is fine if you believe that the UK is undervalued and will recover soon but do you?
If you really do, then think about IVI which offer great shares and an amazing discount on the underlying assets today.

You seem massively underweight the best market in the world, The USA.
That has demonstrably cost you dearly in the last year.

I think the best investment decision that I have made in years was to sell almost everything in the UK (except FGT) and invest instead in USA / Global shares directly, or via ITs like Fundsmith and Lindsell Train.

I now find myself looking at UK shares like Leg & Gen, comparing them with Paypal, for example, and find it incredible that I ever found the UK shares interesting as business propositions.

Would you sooner own:

Paypal
Microsoft
Disney
Nestle
LVMH

Or

Vod
GSK
BATS
etc

One last point, CGT is also available now as a fund which would avoid the premium on the IT.
Don't buy it somewhere like HL though or their .45% platform charge will defeat the whole thing.

Gadge

Hi Gadge, I always look out for your posts and value your input.

You raised a number of points in your post, which I feel I should respond to and/or put into context. Bear in mind my post & portfolio was about increasing my defensive positioning, (of a predominantly income focused portfolio).

Firstly, I had decided to leave fixed interest alone, APART FROM the exposure I already get through multi-asset trusts like MATE & SIGT and trusts like Shires and MYI. (E.g. Shires: 25%. MYI = 18%. SIGT = 11%. MATE = 15%

Re Global and US exposure, it should be noted that several of the global trusts have higher exposure to the US - e.g. JPGI @ 53%. and HINT 30%, along with multi-asset trusts like MATE @ 32%. Note also that JPGI, which is my second largest holding, although a growth & income trust, has exposure to technology stocks. I also have a large holding of MCT which gives Canadian and some US exposure.

I had previously reduced my exposure to the US (which involved selling NAIT - North American Income Trust), partly in anticipation of a market correction and partly to try and reduce the number of trusts I hold, relying instead on the exposure provided by the global trusts, though maybe I have reduced my US exposure too much. .

So accepted I probably do have too much UK exposure and am underweight the US. I have in mind the possibility of re-purchasing NAIT if and when a US correction arises, or alternatively adding to JPGI and HINT with future top-ups.

Though again, please note re the UK, I had deliberately increased my weighting there, because I considered the UK to be under-valued because of Brexit uncertainty, and I have therefore been waiting to take advantage of a post-Brexit recovery. I added Murray Income trust (MUT) a year or so back to aid that objective and that has performed well.

Aberdeen Standard Equity Inc (ASEI) has been my biggest under-performer, which I think is because of its exposure to UK small and mid caps, thus I am hopeful of a recovery there in due course. If not that may find itself in my "to be pruned" list.

As a guide the sector sizes as a percentage of the whole portfolio, at the time of posting, were:

UK - 22.5% (includes mid & small cap trusts)
UK direct stocks - 7.7%
Sub-total of UK exposure: 30.2%

Global G&I - 19.5%
Multi-Asset - 9.3%
North America (MCT) - 6.7%
Asia Pacific - 7.3%
Sub-total of Global exposure: 42.8%

Property - 12.1%
Environmental/Renewables - 4.8%
Infrastructure 4.4%
Utilities - 1.6%
Pharma - 1.9%
Gold & Resources 2.2%

Thanks again for your thoughts.

[Gadgeisbackagain]

Hi Richfool,

Thanks. likewise, I tend to find what you are up to quite interesting as well.

Maybe this will help your thinking. This is what John Baron bases his IT portfolios on....

https://www.pimfa.co.uk/private-investo ... llocation/

Gadge

PS I just took a look at Mate and think their share selection looks fantastic. I may well buy some soon so thanks for the heads up on that one.

[Spet0789]

Further to the above thread, would anyone suggest any bond funds to increase defensiveness?

I am aware that the likes of PNL and CGT would give some exposure, albeit at a price. Another option, after watching Monabri's suggested Vanguard video, could be an ETF such as VIGBBD, IGLH or VGOV.

IBT5. US inflation linked bonds sub 5 years. Basically inflation proof cash in the world’s reserve currency.

[richfool]

Further to the above thread, would anyone suggest any bond funds to increase defensiveness?

I am aware that the likes of PNL and CGT would give some exposure, albeit at a price. Another option, after watching Monabri's suggested Vanguard video, could be an ETF such as VIGBBD, IGLH or VGOV.

IBT5. US inflation linked bonds sub 5 years. Basically inflation proof cash in the world’s reserve currency.

Thanks for the suggestion. In the event I decided to leave bonds alone, as I didn't understand them well enough and they are much too high. I will just rely on the exposure I get through some of the IT's mentioned in my previous post.