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Bond Allocation
ainsworthm1985
Posted: 13 July 2017 12:26:27(UTC)
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Hi,

I'm 32 and investing £600 net per month into a SIPP with HL.

At the moment I am invested as follows:

27.5% in UK equities (a mixture of FTSE100 and FTSE250 ETFs and Small Co ITs);
27.5% in Global equities (again a variety of ETFs and Small Co ITs);
25% in Bonds (10% UK Gilts, 10% UK Corporate and 5% UK Index-Linked)
20% Other (Private Equity, Infrastructure, Gold, Property, Biotech)

I am happy enough with the diversification of the portfolio, although might sell some UK to invest in more Global, but am beginning to wonder whether my bond allocation is a little high, given I keep reading about upcoming interest rate rises and the effect that will have on the capital price of my holdings. I do have a long investment horizon so could just leave as is but would appreciate peoples thoughts.
Mr Helpful
Posted: 13 July 2017 14:26:49(UTC)
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ainsworthm1985;48849 wrote:
Hi,
At the moment I am invested as follows:

27.5% in UK equities (a mixture of FTSE100 and FTSE250 ETFs and Small Co ITs);
27.5% in Global equities (again a variety of ETFs and Small Co ITs);
25% in Bonds (10% UK Gilts, 10% UK Corporate and 5% UK Index-Linked)
20% Other (Private Equity, Infrastructure, Gold, Property, Biotech)

I am happy enough with the diversification of the portfolio, ........................ but am beginning to wonder whether my bond allocation is a little high, given I keep reading about upcoming interest rate rises and the effect that will have on the capital price of my holdings. I do have a long investment horizon so could just leave as is but would appreciate peoples thoughts.


If concerned about interest rate (duration) risk leading to capital losses, consider short duration Bonds to minimise the volatility e.g. : -
IGLS Short-Term Gilts (but seriously sub-inflation yield)
IS15 Short-Term Corporates (yield better but again may prove sub-inflation)

Index-Linked mostly have a horrendously long duration, have been bid to eye-wateringly high prices; and some suggest should be avoided at present.

Institutions such as Pension Funds are obliged to buy Gilts at any price to match liabilities; but we as retail investors are under no such obligation. So don't forget good old Cash; no capital risk other than inflation erosion !
3 users thanked Mr Helpful for this post.
dlp6666 on 13/07/2017(UTC), ainsworthm1985 on 14/07/2017(UTC), Mike L on 16/07/2017(UTC)
Catch The Pigeon
Posted: 13 July 2017 14:31:51(UTC)
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Given your age, I'd say your bond allocation is a bit high but it depends on your attitude to risk.

Given you can't access this money for at least 25 years, I'd personally reduce the bond allocation and increase equity allocation.
4 users thanked Catch The Pigeon for this post.
dyfed on 13/07/2017(UTC), AJW on 14/07/2017(UTC), ainsworthm1985 on 14/07/2017(UTC), Tim D on 17/07/2017(UTC)
Law Man
Posted: 14 July 2017 12:45:16(UTC)
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The benefit of bonds is diversification: if equities fall, you do not lose on everything.

At your age, I agree with Pigeon that you could reduce the bond element.

The other aspect is the problem that, at present, equities are highly priced; so you may wish to defer buying new equities. As a fairly risk free home for the reserve, you have cash or short duration bonds.

It seems everyone agrees long duration bonds offer little upside, and a real risk of significant capital loss.

As such, I agree with Mr Helpful: put the money in low cost short duration bonds. I hold an I-Shares ETF IS15 which pays out 2.35% and has a TER of 0.2%.
3 users thanked Law Man for this post.
ainsworthm1985 on 14/07/2017(UTC), Robin Stone on 14/07/2017(UTC), Mike L on 16/07/2017(UTC)
Colm Maguire
Posted: 14 July 2017 13:32:51(UTC)
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I agree with Pidgeon.
If you were following a typical pension lifestyle choice you would have zero in bonds until the age of 50 - though this varies by scheme.
Then you could gradually move to bonds.
But if you intend to use a SIPP including after retirement then even in retirement your bond allocation could be small.
1 user thanked Colm Maguire for this post.
Tim D on 17/07/2017(UTC)
King Lodos
Posted: 14 July 2017 15:16:35(UTC)
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No one really knows what interest rates are going to do – economists have predicted they'd rise I think almost every year for the past 20 years .. But you can say government bonds are more expensive than they've ever been.

Although with inflation so low, real yields aren't THAT out of line with historical averages .. When you could get 15% on a 30yr bond in the 80s, inflation was up around (I think) 17% .. So they looked awful at the time.

Some might say Emerging Market Debt is where you're likely to get better returns from here – just going on valuations.

My bond portfolio is mostly Corporates, so it won't diversify against big shocks in the stock market, or recessions, anywhere near as well as government bonds – and maybe not at all .. But it's provided steady returns in these markets .. Returns quite comparable to dividend stocks:

55% GAM Star Credit Opportunities
23% Royal London Short Duration Credit
22% Royal London Short Duration High Yield
10% Royal London Short Duration Inflation-linked

I'd call it barbelled .. So the GAM Star half is in high quality companies, with very long (perpetual) duration .. The other half is in very short-duration, mostly Junk bonds .. I'm completely avoiding the middle of the market.

The Inflation-linked bit is really just a bit of hedging at the moment – it's the bit that might exhibit some negative correlation to stocks, and some fund managers envisage these coming into their own at some point in the future .. If we have a decade of stagflation, it might be that that becomes my largest holding?
5 users thanked King Lodos for this post.
S Dobbo on 14/07/2017(UTC), Jenki on 14/07/2017(UTC), Mike L on 16/07/2017(UTC), dlp6666 on 17/07/2017(UTC), Tim D on 17/07/2017(UTC)
Betty G
Posted: 14 July 2017 19:34:06(UTC)
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I do not hold any bond funds of any description. I prefere to hold a handful of selective corporates, where I 'should' receive my investment back at maturity.
I have never quite understood the returns from bond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.
dyfed
Posted: 15 July 2017 17:35:56(UTC)
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I am beginning to wonder whether we are going to see bond prices go down and yields rise in anything but the most gentle manner. It seems unlikely that Ms Yellen is going to raise interest rates much in the near future. And while unwinding QE by several National Banks remains possible it looks as though they will take great care not to frighten the horses. Inflation certainly remains a threat, but presumably bond managers are well versed in dealing with this?

I am considering moving out of short duration into more mainstream bonds with a better yield. Probably hold my floating rate incl NBLS as an inflation hedge.

Any thoughts?
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dlp6666 on 17/07/2017(UTC)
King Lodos
Posted: 15 July 2017 22:43:54(UTC)
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Betty G;48915 wrote:

I do not hold any bond funds of any description. I prefere to hold a handful of selective corporates, where I 'should' receive my investment back at maturity.
I have never quite understood the returns from bond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.


The bit where Income funds lose 5% suddenly is the bit when they go ex-dividend – that's your income coming out of the fund .. It's how bond funds work.

See here, the ex-dividend date is July 1st:
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/g/gam-star-credit-opportunities-gbp-accumulation

It's because up until then, the income from all the bonds they're holding is building up and showing up in the fund's share price .. As for mediocre returns, GAM Star gave you lower volatility than almost any bond tracker, and higher returns than the stock market .. A 90% return over 5 years, vs 30% from a tracker.

I don't want to convince people to buy a fairly specialist fund without understanding what they're getting, but in your case: learn how things work first ... THEN have opinions
2 users thanked King Lodos for this post.
dlp6666 on 17/07/2017(UTC), Tim D on 17/07/2017(UTC)
Mr Helpful
Posted: 16 July 2017 07:27:22(UTC)
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dyfed;48941 wrote:

I am beginning to wonder whether we are going to see bond prices go down and yields rise in anything but the most gentle manner.
....................
I am considering moving out of short duration into more mainstream bonds with a better yield.
.......................
Any thoughts?


IGLT (core Gilts) with duration 10.7 years, moved up 25%ish from late 13 to mid 16, and has since zig-zagged 10%ish down from that mid 16 peak.
Is the extra yield (1.88% v 0.74%) worth that kind of volatility ?

The usual -ve correlation flight to safety of Gov't Bonds in a Stock turndown showed only to a limited extent over that period, but might be an added attraction should the long anticipated serious Stock slump ever arrive.

Certainly food for thought.
Remain firmly undecided, so keeping short duration for now.
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dyfed on 16/07/2017(UTC)
Betty G
Posted: 16 July 2017 08:12:23(UTC)
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King Lodos;48947 wrote:
Betty G;48915 wrote:

I do not hold any bond funds of any description. I prefere to hold a handful of selective corporates, where I 'should' receive my investment back at maturity.
I have never quite understood the returns from bond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.


The bit where Income funds lose 5% suddenly is the bit when they go ex-dividend – that's your income coming out of the fund .. It's how bond funds work.

See here, the ex-dividend date is July 1st:
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/g/gam-star-credit-opportunities-gbp-accumulation

It's because up until then, the income from all the bonds they're holding is building up and showing up in the fund's share price .. As for mediocre returns, GAM Star gave you lower volatility than almost any bond tracker, and higher returns than the stock market .. A 90% return over 5 years, vs 30% from a tracker.

I don't want to convince people to buy a fairly specialist fund without understanding what they're getting, but in your case: learn how things work first ... THEN have opinions



I'm sure that the patronisation in your post was unintentional. The drop in price Of course is due to going ex dividend, hence my comment about the dividend being a mockery. When referring to mediocre returns, I quoted 5 month returns, so I don't quite see your logic in producing returns over a different period. Of more concern to me though is why on earth have you compared this Bond funds returns with a stock market tracker ?
1 user thanked Betty G for this post.
Mickey on 17/07/2017(UTC)
King Lodos
Posted: 16 July 2017 10:13:21(UTC)
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Betty G;48951 wrote:
King Lodos;48947 wrote:
Betty G;48915 wrote:

I do not hold any bond funds of any description. I prefere to hold a handful of selective corporates, where I 'should' receive my investment back at maturity.
I have never quite understood the returns from bond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.


The bit where Income funds lose 5% suddenly is the bit when they go ex-dividend – that's your income coming out of the fund .. It's how bond funds work.

See here, the ex-dividend date is July 1st:
http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/g/gam-star-credit-opportunities-gbp-accumulation

It's because up until then, the income from all the bonds they're holding is building up and showing up in the fund's share price .. As for mediocre returns, GAM Star gave you lower volatility than almost any bond tracker, and higher returns than the stock market .. A 90% return over 5 years, vs 30% from a tracker.

I don't want to convince people to buy a fairly specialist fund without understanding what they're getting, but in your case: learn how things work first ... THEN have opinions



I'm sure that the patronisation in your post was unintentional. The drop in price Of course is due to going ex dividend, hence my comment about the dividend being a mockery. When referring to mediocre returns, I quoted 5 month returns, so I don't quite see your logic in producing returns over a different period. Of more concern to me though is why on earth have you compared this Bond funds returns with a stock market tracker ?


In that case it was largely unavoidable.

If you're holding individual bonds, what you probably don't see is what's happening to their capital value on a daily basis – "What would I get if I sold this bond back to the market today?"

You think: I'll get the capital back on maturity anyway .. Well so do the bond funds, but imagine your bond holdings are a fund: you're going to need to keep buying bonds – keep cycling that cash – so in effect your bond holdings will be acting exactly the same as a bond fund.

Capital value will go up and down, but they're paying a steady income.

What you might not be factoring in (and this is the reason you might hold 200 bonds) is the chance of a bond defaulting .. If you're just holding 2 or 3 bonds, when one of them defaults, you wipe out as much as a third of your capital .. At the moment, on average, that would be about 5 years of returns .. In a fund of 100+ bonds, there are defaults all the time, but the impact is minimised.

I could buy a bond yielding 15% today, but I might have a 1 in 3 chance of it defaulting any particular year .. So there's no easy way to make more than a bond tracker fund – apart from being in the right part of the bond market, as GAM Star has been .. And you can compare GAM Star to stocks or bonds because it invests in a type of bond that's very similar to both.

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Guest on 16/07/2017(UTC)
dyfed
Posted: 16 July 2017 14:58:39(UTC)
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Betty G;48951 wrote:

I'm sure that the patronisation in your post was unintentional. The drop in price Of course is due to going ex dividend, hence my comment about the dividend being a mockery. When referring to mediocre returns, I quoted 5 month returns, so I don't quite see your logic in producing returns over a different period. Of more concern to me though is why on earth have you compared this Bond funds returns with a stock market tracker ?


Just wanted to offer my empathy re the rude, patronising and poorly argued posts you and I have had from KL (see Woodford Patient incl comment from Vince). I assume it's a coincidence that we're both female!
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Betty G on 16/07/2017(UTC), Mr Helpful on 17/07/2017(UTC), Mickey on 17/07/2017(UTC)
King Lodos
Posted: 16 July 2017 15:09:47(UTC)
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dyfed;48957 wrote:
Just wanted to offer my empathy re the rude, patronising and poorly argued posts you and I have had from KL (see Woodford Patient incl comment from Vince). I assume it's a coincidence that we're both female!


I'm an equal opportunity patroniser .. Betty made ridiculously ill informed statements about the GAM Star fund, despite having said a mere sentence earlier he/she had no idea how bond funds worked .. I don't think my response was poorly argued.

I respect people who try and understand what's being said before they start attacking it.
Betty G
Posted: 16 July 2017 18:06:39(UTC)
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In no way do I wish to enter into an argument, I don't think that's what this forum is about, but I have to agree with Dyfed in that I really do believe that your arguments are poorly backed up in that you seem to clutch at any old selective straw to try and justify them.

I only reply because I take exception to your latest post. I said that the 5% drop in your favoured bond fund virtually wiped out the past 5 months returns. I don't see what you don't understand about that. IT DID. My 4 corporate bonds have fared much better, but that isn't my argument. It could be said that by holding over 200 bonds, your fund is almost 200 times more likely to see a default.

I said that I didn't quite understand the returns on bond funds, that is quite different to understanding the returns on my bonds. I found it quite amusing that you assumed that I hold several corporate bonds and had no idea about dividends and pricing.
I think that if you look at your last sentence, you might begin to see the problem. You described my post as an 'attack'.
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dyfed on 16/07/2017(UTC), Mr Helpful on 17/07/2017(UTC), Mickey on 17/07/2017(UTC)
King Lodos
Posted: 16 July 2017 19:10:13(UTC)
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Betty G;48966 wrote:
I only reply because I take exception to your latest post. I said that the 5% drop in your favoured bond fund virtually wiped out the past 5 months returns.


Look, you really don't understand how bonds or bond funds work..

The 5% drop is the annual dividend coming out of the fund .. If the dividend is 5%, it's always going to take the fund down 5%.

The fact the fund's made that in 5 months means the other 7 months of returns are all additional capital gain .. Which is why the Total Return over 12 months is 14.1% .. If your bonds are returning 14.1% annually, there's a very good chance they're going to default .. I'm not trying to win an argument, I'm genuinely trying to explain something to you.
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bill xxxx on 16/07/2017(UTC)
Betty G
Posted: 17 July 2017 07:30:11(UTC)
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I actually do understand all of that, there's actually nothing that's really difficult 'to' understand. My original point was that with so many different grade bonds of differing durations, prices and current yields, the individual investor has no hope of predicting returns, whereas an investor holding a handful of bonds does. He or she knows the current prices, the dividend dates and the maturity. That's the only point that I tried to make. Unfortunately you latched onto a throwaway line that I wrote. I will be more careful if I post again !
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Mr Helpful on 17/07/2017(UTC)
S Dobbo
Posted: 17 July 2017 07:34:32(UTC)
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Betty G;48915 wrote:

I have never quite understood the returns from buond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.


Of course it will drop inline with the divided, just like a share would, if you want an income due to your personal position i.e. retired then you want the Divi, else go for the acc. If I earn 5% then I move it from one account to another I've not lost it have I?

Can you provide details of an etf with the same stability?
200 bonds is a tiny proportion of the 1,000's of bonds available, I'm sure the fund manager has earned his FE Alpha Manager status for good reason.
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King Lodos on 17/07/2017(UTC), dlp6666 on 17/07/2017(UTC)
Betty G
Posted: 17 July 2017 07:55:29(UTC)
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S Dobbo;48976 wrote:
Betty G;48915 wrote:

I have never quite understood the returns from buond funds, they are a little too complicated for my liking. For instance, the Gam star fund that is mentioned above may not be all that it appears to be. The Inc. fund ( as opposed to the Acc.) saw its price drop by nearly 5% in one day at the beginning of July. That makes a mockery of the dividend doesn't it. In reality, it wiped out 5 months of mediocre returns.
When a fund holds over 200 bonds, I suspect that you would be better off in an etf. The Gam Star example above highlights the complexity of these vehicles, and how one can be 'hoodwinked'.


Of course it will drop inline with the divided, just like a share would, if you want an income due to your personal position i.e. retired then you want the Divi, else go for the acc. If I earn 5% then I move it from one account to another I've not lost it have I?

Can you provide details of an etf with the same stability?
200 bonds is a tiny proportion of the 1,000's of bonds available, I'm sure the fund manager has earned his FE Alpha Manager status for good reason.




Oh dear, there's always one isn't there. I take it that you are one of Nigel's disciples Mr 'DOBBO'. ?
You really are trying to teach a Grandma to suck eggs here .
S Dobbo
Posted: 17 July 2017 08:28:34(UTC)
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Betty G;48915 wrote:

I have never quite understood the returns from bond funds, they are a little too complicated for my liking.


I think that's where you should have stopped.
2 users thanked S Dobbo for this post.
King Lodos on 17/07/2017(UTC), Tim D on 17/07/2017(UTC)
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