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IT portfolio - debt/alternatives to gilts
Tom 123
Posted: 12 October 2017 10:53:45(UTC)

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Hi, curious as to others weighting to debt / alternatives to gilts in their portfolios.

Currently I have a model 5% for gilts/developed sovereign debt, 5% for index linkers, 5% for cash and , 5% for alternative debt.

The index linked (vanguard) and cash are as intended %. The gilt/ Dev sovereign debt a percentage or two due to perceived overvaluation.

In terms of alternative uncorrelated debt what are the alternatives? I hold Investec local currency EM debt, Carador income and Funding Circle IT.

Can the gilt portion be modified to other sources of debt? I have considered SQN Asset, and P2P global (recent weaknesses) as a top up. Will these forms of debt hold up in a downturn? I'm not so sure against gilts/treasuries which are overvalued but possibly the only real diversifier (I also hold 7% in gold).
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Mickey on 12/10/2017(UTC)
Tug Boat
Posted: 12 October 2017 11:23:21(UTC)

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Bought debt and REITs this year.

Debt as follows:


It is about 10% of my total investments. It's there as a diversifier, protection against an equity slump and to generate income.

My needs may be different as I need income for my vices, however the above are certainly diverse. Whether they protect against an equity slump is moot.


Tug is not a registered advisor, he gets investments wrong quite often and wine and rugby have a large influence on his investment style. Please remember Tug's investments generally go down and he cannot be held responsible for Gloucester, the England or Lions rugby teams.
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Sara G on 15/10/2017(UTC), David 111 on 15/10/2017(UTC), The Spanish Inquisition on 16/10/2017(UTC), DGL on 16/10/2017(UTC)
King Lodos
Posted: 12 October 2017 17:25:46(UTC)

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David Swenson (of the Yale endowment) would probably say the ONLY form of debt that holds up and offers any real diversification from stocks are US gov bonds and gilts.

But of course they are at stretched valuations (at least relative to the past), and the last time bond yields got nearly this low, around the 1930s, bonds spent the next 30-40 years returning effectively nothing after inflation.

Index-linked bonds are priced to return around nothing or negative after inflation for the next 30+ years, so that's presumably what the market expects.

(If we got a return to monster inflation, linkers could be useful .. The 70s saw stocks and gov. bonds do very poorly .. But I believe some think automation may have a very deflationary effect?)

Personally I use GAM Star Credit Opps as my main bond holding, and Royal London Short Duration Credit, High-Yield and Inflation-linked as secondary holdings .. But I'd expect quite high correlation with equities in all but the inflation-linked .. It may make more sense to hold cash as a diversifier – certainly Warren Buffett's about 35% cash, 10% bonds .. Not an uncommon stance

Tim D
Posted: 12 October 2017 19:20:39(UTC)

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King Lodos;51897 wrote:
David Swenson (of the Yale endowment) would probably say the ONLY form of debt that holds up and offers any real diversification from stocks are US gov bonds and gilts.

Over on there's been a steady stream of pieces from Swedroe pointing out that corporate bonds behave a lot more like equities than treasuries example (ah, I see it quotes Swenson at the end too!) or another one, and more on the same theme amongst this lot.
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King Lodos on 13/10/2017(UTC), Sara G on 15/10/2017(UTC)
Mr Helpful
Posted: 13 October 2017 07:31:28(UTC)

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Our holdings; but very very far from recommendations :-

GRIO (the unpopular Ground Rents) as a proxy for IL Gilts (maybe)?
SEQI and GCP as mentioned here from time to time, but uncertain about the Stock correlations.

Otherwise then reluctantly the conventional Bond ETFs (US unhedged and UK, corporate and government), but limiting to short-term/duration Debt to minimise interest rate risk, in view of present bond pricing.
Sweet spot maybe IS15 (short-term Sterling Corporates), but not that sweet!
Elie Gabay
Posted: 15 October 2017 10:30:53(UTC)

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I've bought Russian short-term bonds directly via Saxobank trading account. You are exposed to Russian Ruble movements, but Russia has very solid finances, and I think the currency is on the way up as they recover from sanctions.
Sara G
Posted: 15 October 2017 11:42:16(UTC)

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I can't bring myself to buy bonds of any kind due to high valuations and/or correlations with equities (and haven't held any directly for some years), although do have some exposure via PNL/Troy Trojan - the manager has a high proportion in index-linkers. Otherwise I diversify via precious metals, a small amount of digital assets, and cash.

Holding 20% or more of a portfolio in cash for an extended period is frustrating, however due to the negative returns, especially if the spending power of sterling falls vs other currencies... Factoring in possible downward pressure on sterling due to Brexit negotiations going badly, and that (I think) dollars are safer than the Euro (or Yen, given the N Korea situation) I'm thinking about putting some cash into SGBP/USD2 - an ETF tracking an index that is short sterling and long USD.

The rationale for this is that for me a large part of the reason to hold cash or equivalents is to take advantage of buying opportunities in equities, and having exposure to USD would provide greater flexibility if I wanted to top on non-UK holdings at a time when sterling was weak (I'm currently underweight US equities, for example and would be looking to top those up if markets fell.)

NB this is not a recommendation as I haven't fully researched it yet.

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martin hargan on 15/10/2017(UTC), Tim D on 15/10/2017(UTC)
King Lodos
Posted: 15 October 2017 12:12:23(UTC)

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I could be tempted by US treasuries again soon..

The 10yr yield's been above 2.5% this year – and if you buy individual bonds of course, you've got the choice of holding on for a guaranteed 2.5% and return of capital, or selling if capital rises.

If we say the 10yr's hovering around 2.5%, well US stocks are on a CAPE ratio around 29, which crudely predicts a 3.4% annual return .. There's inflation to consider too – because you probably don't want to sell stocks and buy treasuries if inflation's going to rise much, and if it's not, maybe that's a good environment for stocks to slowly melt-up .. But as a value investor, we're getting closer to that point where a safe 3-3.5% from bonds might trigger quite a sell-off in stocks

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The Spanish Inquisition on 16/10/2017(UTC)
Sara G
Posted: 15 October 2017 12:55:01(UTC)

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I think for me the issue with US treasuries is that, while relatively safe, they are not actual cash... and there is presumably still the risk that capital would fall just at the point when I wanted to sell out, so it isn't a pure play on a rising dollar. On the other hand if there was a flight from equities, as you suggest, that money would most likely flow into the safer bonds.

Thinking about Warren Buffett... he is probably quite happy to have so much cash because that cash is in dollars, so there is a risk for non-US investors following his example in terms of asset allocation.
King Lodos
Posted: 15 October 2017 14:12:49(UTC)

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Well if you buy bonds on the primary market, you'll always get back the face value of the bond .. So you buy a 2.5% bond for $1,000, and short of a government default, you will get $1,000 back at maturity, and you're guaranteeing that interest.

So that's why they're really the yardstick against which all other valuations should probably be measured (it's effectively 'risk free').

It's an interesting consideration re: USD exposure .. Obviously the problem today is you're having to use quite cheap (relative to history) GBP to buy quite expensive USD .. I've never been very attracted to currency speculation, as apart from momentum, I'd assume prices today had factored all the relevant information in .. I have pondered a haven currency fund though – maybe something like a weighted basket of currencies (dollars, swiss francs, yen, gold, 1% in bitcoin?) as a sort of neutral fund to park cash in .. Or maybe gold's still really the best bet for that?

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Sara G on 15/10/2017(UTC)
Alan Selwood
Posted: 15 October 2017 14:59:11(UTC)

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For me, debt instruments are something I should theoretically buy to create diversification, but as they all seem bad value, I have held off (except where Ruffer and co hold them as part of a balanced fund). Index-linked NSCs have been my only bond-like purchase in the last 10 years, and that form of monetary production line 'went into liquidation' once the government became too wary of its liabilities if inflation were to pick up again.

Although cash is said to be risk-free, inflation and political meddling usually reduce its purchasing power slowly or quickly to near zero.

Gold is, to my mind, a better risk-reducing tool, but unfortunately most people consider it to be too volatile relative to cash, whereas the reality is that cash is volatile relative to gold. Again, political meddling and financial wheeler-dealers create more volatility than I think is justified, and give greater apparent credence to cash than it deserves relative to precious metals.
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Sara G on 15/10/2017(UTC), dd on 17/10/2017(UTC)
Mr Helpful
Posted: 15 October 2017 17:43:16(UTC)

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As we are drifting sideways to Gold thoughts, etc, how about more general exposure to Commodities such as BRCI (Commodities Income).
OK it is essentially Stocks, but the BRCI price has traced a very different path to Global Stocks, has not exactly covered itself in glory, but it does at least produce an income albeit reduced after dividend cuts.

Hold BRCI in our Stock allocation, but do wonder from time to time whether that is the correct location?
So far felt unable to relocate in with the defensives, such as Bonds.
Maybe a third category?
King Lodos
Posted: 15 October 2017 18:45:44(UTC)

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I prefer to have natural resources as a separate asset class (taking a leaf from Yale's book) – as I think you want some way to systematically profit from volatility and control risk.

So if I have 10% Natural Resources, I could rebalance regularly to keep my allocation around that 10% mark .. Yale rebalance as often as daily; or treat it as a trade, and stay long until some sensibly placed Stop-loss is hit, taking it back down to my target allocation.

It's said miners are stocks to rent, not buy .. Because if you were just long miners (say), and not rebalancing or trading, you'd be getting these 800% returns, and then giving them back again.

You can consider natural resources inflation protection, along with things like property and TIPS.

I'm in two minds .. We haven't had a decade of poor stock and bond returns, with monster inflation, since the 70s .. Quite a few of our larger multi-asset funds (as well as platforms like Vanguard and I think Blackrock) are warning of surprise inflation .. But there's also the perspective that changes in the global economy mean inflation stays low .. This is why I'm a trend-follower .. I'd hope prices can tell me what way things are going so I don't have to make a prediction
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Mr Helpful on 16/10/2017(UTC), Guest on 16/10/2017(UTC)
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