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What bond funds should I buy?
Jpb250
Posted: 19 January 2018 09:00:22(UTC)
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I want to invest £100, 000 of my portofolio in bonds to provide ballast and defence in case of a drop in equities. I do not want bonds that are likely to behave like equities in the event of a major drop in the markets. Any fund suggestions (including the amount I should put in each) would be greatly appreciated. I am six years away from retirement and my portfolio is currently invested in diversified global equities.
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kWIKSAVE
Posted: 19 January 2018 11:27:01(UTC)
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GAM Star Credit Opportunities 20%

Royal London Sterling Extra Yield 20%

Morgan Stanley Sterling Credit Bond 20%

Legal & General All Stocks Index-Linked Gilt Index 10%

Fidelity Moneybuilder Income 5%

M&G Global Macro Bond 25%
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Mr Helpful
Posted: 19 January 2018 11:34:05(UTC)
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Wow !!!
That is a question and a half !!!

If we are in or going to be in a rising interest rate environment in the years ahead, then theory suggests Interest Rate Risk should be minimised. This would involve avoiding long-duration Bonds, even though they (usually) offer the more aggressive -ve correlation to Stocks.

In our own portfolio, domestic Bond allocations are split between :-
IGLS Short-Term Gilts (yield circa 0.54%)
IS15 Short-Term Corporates (yield circa 2.15%)
The Corporates involve adding Credit Risk, for which the present yield spread over Gilts maybe compensates.
It will be observed yields are sub-inflation, but today that comes with the Bond territory, although many pundits suspect inflation has peaked and will now subside.
Some Higher and High-Yield (aka Junk) Bonds are used to boost overall yields, but with the full awareness they will almost certainly be +vely correlated with Stocks, and fall in sympathy should Stocks fall.

Then there is the world of managed Bond Funds, which others are outlining.
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Tug Boat
Posted: 19 January 2018 11:37:44(UTC)
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I'll tell you what I hold:

RL sterling extra yield bond
CMHY
NCYF

Whether these insulate against market falls I don't know, but their divi should

You could try RECI, which I hold, it's more debt than bond, but has done me no harm. GAM Star is worth a punt too.

I tend to go for divi, this supports my decadent life style. You can't have enough red wine and rugby tickets are getting expensive.
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Jpb250 on 19/01/2018(UTC), dlp6666 on 19/01/2018(UTC), Mickey on 19/01/2018(UTC)
PaulSh
Posted: 19 January 2018 11:41:37(UTC)
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I see Mr. Helpful has just beaten me to it, so I'd just like to reiterate his point about duration, which is to go for shorter durations in the current environment. That said, if you really want "ballast and defence", there's no substitute for cash. And by that I mean real cash rather than money market funds as in the US they were the first to fail in the last financial crisis.
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King Lodos
Posted: 19 January 2018 14:00:32(UTC)
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I'm a big fan of GAM Star Credit Opportunities .. But I'd think of it, and corporate credit in general, as being closer to equities than bonds. (I'm intrigued to see how it holds up when stocks stumble next .. but the credit of banks and asset managers won't be a flight-to-safety)

As a value investor, you probably shouldn't be buying bonds, especially on a 6 year horizon – anything could happen of course, but it may be a fairly guaranteed way to lose money.

Warren Buffett's been reducing his bond holdings (to 8%), and holds much more in cash now (36%) .. I'd go for NS&I 5 year Guaranteed Income bonds – they'll behave like cash, but you get a 2.17% yield (better than gilts, and no duration risk) .. I suspect many fund managers would be in these too if there weren't for the £1m limit .. Ruffer Total Return could be worth a look, with their high weighting in inflation-linked bonds, and use of options – but if the aim is to de-risk, I think cash

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Joe Soap
Posted: 20 January 2018 03:54:52(UTC)
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Related question - I have been keeping an eye on RL sterling extra yield bond for sometime now. I have never held this or any other bond fund before. The yield is very attractive and the manger really seems top notch. Performance has been pretty good. But despite me being nervous about shares, buying a bond fund could be jumping from the frying pan into the fire?

I don't really understand it, but it seems to me as inflation is heading upwards and interest rates will follow suit. This will be bad for bonds and for "bond like" shares too? Thanks.
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Jpb250 on 22/01/2018(UTC)
The Spanish Inquisition
Posted: 22 January 2018 09:20:37(UTC)
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[quote=Jpb250;55618 I do not want bonds that are likely to behave like equities.[/quote]
There is always a lot of confusion when reading articles about bonds as its seldom made clear which class of bonds are being talked about.
Corporate bonds - behave very much like shares as they are issued by companies which obviously have a risk of suffering a default in a recession or business failure, higher yields should reflect higher risk.
Government bonds - behave inversely to stocks as they are issued by central banks and during recessions, global threats etc. are where money gets parked for safety. Each country has a different credit rating so their yields vary, US Treasuries 10yr are currently yielding 2.7% and is looked upon for most valuation metrics (if you can get 2.7% risk free, many stocks are way overvalued on future returns).

So to be clear, you should be looking at US Treasuries, UK Gilts and I would avoid all others over a 6yr time frame.

By the way, do you also hold some physical gold? in the form of coins preferably - Also a great diversifier.

Very importantly, you say you only have 6 years to go before retirement as if its some sort of investment end date.....It is not......if you've done well with previous strategies then I would suggest you carry on with those and enjoy many a prosperous year ahead.
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John Delwick
Posted: 22 January 2018 09:40:23(UTC)
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Royal London Sterling Extra

Morgan Stanley Sterling Credit Bond


These two seem pretty good.
Tom Mozy
Posted: 22 January 2018 11:08:24(UTC)
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Bonds in my opinion are so highly valued that there is more risk with them than equties.

Think back to some of the market panics.

Russian Debt default that took down long term capital management. Wall street bailed them out.

Tech bubble - green span bailed the markets out by 1% rates and inflated the 2008 housing crash.

2008 - Fed bailed out the world.

The scale of the crisis is always an order of mangnitued larger.

Who will bail the worlds central banks out in the next crisis?

The IMF and world bank. You probably dont want to be holding national currencies or thier debt when it happens.

Gold, alternative assets, and real assets you can touch, farmland, comods, real estate might be a better protector than bonds.
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Mr Helpful
Posted: 22 January 2018 11:44:04(UTC)
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Tom Mozy;55751 wrote:

1. Bonds in my opinion are so highly valued that there is more risk with them than equities.
2. Who will bail the worlds central banks out in the next crisis?
3. Gold, alternative assets, and real assets you can touch, farmland, comods, real estate might be a better protector than bonds.


1. Maybe. Depends on definition of 'risk'.
History suggests far more money can be lost far more quickly with Stocks than Gov't Bonds.
But Bonds are certainly expensive today. and look set for some sort of decline. How much and how quickly at the longer duration end is the question?
2. The printing press.
3. Again maybe; all potential 'defensives', but some are difficult to get inside an ISA (if that is the OP's aim).
Some of each plus Bonds plus Cash, is used by several here.
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Jpb250 on 22/01/2018(UTC)
Tim D
Posted: 22 January 2018 15:48:27(UTC)
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Jpb250;55618 wrote:
I want to invest £100, 000 of my portofolio in bonds to provide ballast and defence in case of a drop in equities. I do not want bonds that are likely to behave like equities in the event of a major drop in the markets.


Given the OP's requirements, I'm absolutely flabbergasted by some of the high yield crackhouses he's being pointed at in some of the posts here. Does credit quality mean nothing to anyone these days; is the income-hungry mob just looking at the yields and going for whatever pays the most without questioning the risks? For example the factsheet for Royal London Sterling Extra Yield Bond fund reveals it to be AAA/AA/A 1.3%, BBB 29.5%, BB or below 35.7%, Unrated 18.2%. And I can't find a credit quality breakdown for GAM Credit Star Opportunities anywhere, but their factsheet does say "Will participate in issues lower down the company's capital structure in order to capture higher returns". Contrast with government bonds-only vehicles like IGLT or IBTS which is 99.9% AA or AAA.

Just to make it clear what sort of performance this sort of bottom fishing might get you when the next 2008 comes along, here's a trustnet plot (Royal London Sterling Extra Yield Bond vs equities and gilts benchmarks):

Down in flames

Pretty equities-like behaviour from that fund I think! Of course the real trick is to find the investment(s) which give the risk/reward profile *you're* happy with... good luck.

On the topic of bond valuations... for an interesting analysis of the last couple of bond bear markets, read this and this.
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King Lodos
Posted: 22 January 2018 16:05:13(UTC)
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That's it – with corporate credit you're just buying bonds in the same companies you'd otherwise buy shares in.

So then it's an issue of: can you get better value in the bonds or shares?

With GAM Star you're looking at yields around 4-5%, with maybe 42% linked to inflation – so on the one hand it's like buying quite expensive shares (PE 20-25) but a lot better than buying inflation-linked gilts yielding around 0.

Average credit rating is BB, but issuer rating BBB (so the strategy is to buy the lower quality debt in higher quality companies) .. But the fact returns have basically tracked stocks for 5 years means you should probably expect similar downside if it comes.

Between 1980-82, and during the tech crash, were two times High Yield made positive returns when stocks fell .. When earnings are being revised down, stocks lose value, while bonds are paying out what they agreed .. So if stock valuations were the main cause of a correction today (like in the tech crash), bonds yielding 5% could have a margin of safety
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Alan Selwood
Posted: 22 January 2018 18:22:45(UTC)
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In times of panic, always prefer quality over price.

Don't buy any bonds in market conditions where they are highly-priced, offer low or negative real returns, or are long-dated.

Cash and physical gold (not gold derivatives) are better bets in these circumstances.

I wouldn't (and don't) hold any bonds at the moment.
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Tyrion Lannister
Posted: 22 January 2018 18:24:49(UTC)
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Royal London Sterling Extra has been recommended in a couple of posts, I'm invested in that too and would recommend it.

I also hold TwentyFour Dynamic Bond which, according to the Telegraph 25, should be a good defensive fund should interest rates rise in the future.
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Jpb250 on 22/01/2018(UTC)
Tyrion Lannister
Posted: 22 January 2018 18:28:55(UTC)
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Alan Selwood;55767 wrote:
In times of panic, always prefer quality over price.

Don't buy any bonds in market conditions where they are highly-priced, offer low or negative real returns, or are long-dated.

Cash and physical gold (not gold derivatives) are better bets in these circumstances.

I wouldn't (and don't) hold any bonds at the moment.


I agree with this. I do hold bonds (see above) but have no intention of topping up anytime soon. I also hold about 25% cash and some physical gold (SGLN) which I'm topping up on a regular basis when the price is right (like now!).
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King Lodos
Posted: 22 January 2018 18:51:10(UTC)
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Incidentally, one of my favourite charts in a while – 10yr Treasury Yield vs Shiller CAPE Ratio

https://i.imgur.com/ZA1PXkg.jpg

The CAPE basically tells you what people are willing to pay for stocks, and the 10yr yield is what they can get risk-free.

So when bonds were yielding 15%, in the early 80s, people wanted stocks around CAPE 6-7 (a 15% earnings yield) .. Average stock and bond returns in the 80s were 16% and 13% respectively. (valuations are a pretty good estimator)

Today, with bonds around 2.5%, and CAPE ratios in the US around 30, that's a 3.33% earnings yield .. Not looking great for returns.

But inflation was often over 10% in the 80s, so while returns might be much lower, and bar's also much lower.

I *think* what it does show is nothing's really in a bubble .. Bonds look very expensive, until you factor in inflation:

http://www.capitalspectator.com/wp-content/uploads/051208-thumb.GIF

And stocks look very expensive until you compare them to bonds.

Restating the obvious, but it's useful to do that sometimes – a pick-up in inflation and rates could pull the rug out from under these valuations, in which case you probably would want TIPS, gold and Financials/cyclicals/EM
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Mr Helpful
Posted: 22 January 2018 19:03:17(UTC)
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Tim D;55757 wrote:
Jpb250;55618 wrote:
I want to invest £100, 000 of my portofolio in bonds to provide ballast and defence in case of a drop in equities. I do not want bonds that are likely to behave like equities in the event of a major drop in the markets.

Given the OP's requirements, I'm absolutely flabbergasted by some of the high yield crackhouses he's being pointed at in some of the posts here. Does credit quality mean nothing to anyone these days; is the income-hungry mob just looking at the yields and going for whatever pays the most without questioning the risks?


It is unfortunate that in the mind of quite a few investors, Bonds = Safety,
not fully understanding the differing Bonds available.
The average investor probably understands Stocks and Stock-Risk far better than Bonds and Bond-Risk.

Careful examination of the very useful chart posted, explains why the correct sort of Bonds (Gilts) can be advantageous when constructing a portfolio.
To drum it home, Gilts can rise when Stocks fall (-ve correlation).
This is the elusive free-lunch.

The snag pointed out is that Interest Rate Risk/(rises) may impair Gilt valuations going forward, and we don't know how the two influences (investor flight to safety v rising rates) will map out that future path.
Short duration Gilts are at best a compromise, with sub-inflation yields (like Cash), and less of the sought after -ve correlation with Stocks.

It is worth also hammering home once more that 'High Yield Bonds' are also called 'Junk Bonds', for good reason; not only behaving much like Stocks but subject to (Credit) failure.

Thanks for a shaft of light.
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Ark Welder
Posted: 24 January 2018 02:48:12(UTC)
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Jpb250;55618 wrote:
I want to invest £100, 000 of my portofolio in bonds to provide ballast and defence in case of a drop in equities. I do not want bonds that are likely to behave like equities in the event of a major drop in the markets. Any fund suggestions (including the amount I should put in each) would be greatly appreciated. I am six years away from retirement and my portfolio is currently invested in diversified global equities.


Have a look at Morningstar's Fund Screener tool.

  • Select either one of the IMA bond sectors, or a Morningstar Category of one of the GBP {xyz} Bonds or one of Global {xyz} Bonds GBP Hedged.

  • In the Fund Portfolio section you will see a 3x3 grid for Fixed Income. Click on the boxes for the combination of Credit Quality and Interest Rate Sensitivity which are of interest - which in your case ought to be more towards the high credit quality, limited sensitivity corner of the grid.

  • Hit the Search button for the results. You will probably want to try different sectors and Fixed Income styles to get a meaningful choice.



A few points to note (which are a re-hash of previous commentators):

  • The longer the duration, the greater the sensitivity to changes in interest rates.
  • The lower the credit quality, the greater the sensitivity to economic conditions - and with this you get a greater correlation with equities.
  • Conversely, the higher the credit quality, the lower the correlation with equities. (I was tempted to say '...the greater the correlation with gilts', which I would have done before 2008, but the current rolling situation of 'Risk On/Off, fight to safety' means I hesitate to do so)


Just as it is a mistake to lump gilts and corporates together into the generic asset class 'bonds', it's also a mistake to talk about corporate bonds as a single type within this class. (...even without mentioning Convertibles...!)

2000-2004
2008-2010
2011-2013

The performance of investment-grade corporates in 2008-2010 reflects the fear of financial armageddon at the time, and when the only perceived safety was in top-notch sovereign bonds, especially of the USD variety. Note that the sector did not suffer the same degree of drawdown as the lower-credit quality sector.

In the absence of factsheets etc. from the time, I suspect that the reason why the high-yield sector did so comparatively well during 2000-2004 is because interest rates and bond yields were higher, and this meant that the HY funds did not need to move so far down the credit scale in order to meet their objectives. Not quite the same today.



Comparative performance of a prime-grade fund over 2008-2010


+++

On a separate note, the GAM Star Credit (GBP) fund does not have anything like 42% of its holdings in bonds that have inflation linking. What it does have is around a 42% allocation to bonds that have a link to interest rates - and this really is not the same thing because interest rates can fall whilst inflation is still rising, leading to your income being reduced at the same time as your cost of living is rising.
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King Lodos
Posted: 24 January 2018 03:53:47(UTC)
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In 2000, you had stocks pushed to earnings yields below 1%, on future growth expectations .. and because bonds don't grow their earnings, there'd have been no point bidding them up .. So High Yield and Value stocks didn't need to correct.

And interest rates don't have to track inflation – but in practice they generally do, because that's how we cool down an economy .. There's also an argument that we're not measuring inflation correctly now .. So the economy could show signs of overheating, necessitating rates rises, ahead of CPI .. And with rates the main threat to stock valuations, I'd probably rather my inflation protection were linked to rates (GAM's risk is the big bet on UK financials)

https://greensboroobserver.files.wordpress.com/2014/02/inflation-and-interest-rates-relationship.gif
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