Div Policy, Bonds, Gilts, ETFs or other? Short-term low risk returns?

Sigmaf

Having been a bit too financially disorganised over the last 12 months (an enlightening return to academia though!!)....I'm now turning my attention to some financial consolidation.

I have some reading/research to do, but would appreciate some sign posting from those better educated in the art of not throwing your money out of the window!!

Basically, I have a spare amount of cash (reasonable), which is in effect, my retirement fund (although, I've got about another 30yrs of work ahead of me!!)...

I'm not too keen on tying the funds up for more than 12 months, volatile times etc, and I also like to invest in small business opportunities.

Ideally, I'm looking for a reasonably low maintenance 6% return (perhaps, 20% of the portfolio I may play with in a few months if I find the time to research)...but, as overall, as it's my pension....I shouldn't really go too high risk....

Loose thoughts at the moment are either to focus on div policies (need to look at historical data on share recovery) based on the higher yielding companies, corporate bonds, Gilts or ETFs? (which are a completely new animal to me).

Based on experiences, can anybody suggest what area I may want to research as a priority?

Lokolo

When you say higher yielding companies do you mean companies which give out decent dividends?

Gilts are less risk than the others.

ETFs - this needs to be expanded as there are many things you can invest into these.

Corporate Bonds usually require a minimum of £1,000 each. You can spread the risk of each £1,000 by buying Corporate Bond Funds though.

Sigmaf

Hi, thanks for the response....

Yes, the companies offering good div payments with good div cover....(thinking by 8 weeks before, receive div, then hold until recovery of share price).

Corporate bond funds - to research!!

Yes, I have no idea on the concept of ETFs - appreciate many sector options exist, but....how well they perform overall is another matter really (has there been a general trend towards people investing in them?)

I've noticed that some bonds do seem to yield around the 6% mark - is it a case of personal choice or do the likes of HL etc provide managed Bond funds?

Lokolo

There are plenty of Bond Funds. These are usually split up into a couple of sections, Corporate Bond Fund and High Yield Fund. The latter is more risky.

Individual Bonds are put in their own catagory class http://en.wikipedia.org/wiki/Bond_credit_rating

Theres a 'useful' guide. High Yield are more in the lower classes, more risk, more reward. I think things like Gilts are AAA and such. Bonds are B's and High Yields are Cs, something like that anyway (I am not totally glued up on it all!)

Porcupine

I've been doing my own research on bond funds...

First, the meaning of the credit ratings:
http://en.wikipedia.org/wiki/Bond_credit_rating
US-based, but presumably the same ratings apply to the UK as well. What's interesting there is the historical table of defaults (I think that's from 1970-2007, but am not quite sure). Is that table plausible? It suggests 40-50% of B-rated bonds default, which looks very high to me.

When you get a default, is it just that you don't get an interest payment or that the company goes bust and you don't get your capital back?

Now, I don't quite understand charges. There's the distribution yield, which is the projected earnings over 12 months based on the current price of the fund. Then there's the underlying yield, which is the distribution yield minus charges. Am I right so far?

So if I look at the table in the back of the Spring 2009 H-L Investment Times, I see at the top:
Aberdeen Corporate Bond:
Distribution 6.13%
Underlying 5.13%

OK, so that has a 1% AMC. Fine. But then the next one:
Aegon Ethical Corporate Bond:
Distribution 6.6%
Underlying 8.12%

The charges are negative. Huh?

Then I look up the Aegon fund on Trustnet and it tells me the yield for the A units is 6.11% (and 6.51% for the B units). Bear in mind there's about 12 months between Trustnet and H-L valuations, so they don't correlate. Are these underlying or distribution? From that it looks like the A units have an extra 0.5% AMC.

(Just to be clear I only picked those two as the first two alphabetically - I'm not considering investing in them)

Finally, how risky are bond funds as a medium term investment? I want to max out my S&S ISA but treat the extra chunk as pseudo-cash which may needed in say 3 years (but may not, hence wishing to use this year's allowance). By March I'd have £3600 cash and £1800 equities from this year, with the extra £1800 I could put in as low-medium risk investments. I can afford to lose some of it, but I'm just trying to get a handle on the risk - if it's 50% possible loss for equities what might it be for investment grade (4-5% yield) bonds? Some say we're in a bonds bubble - if the bubble bursts how much might prices fall (given that bonds have a coupon value, so they won't fall like equities will unless there's a default)? The price is more of a consideration when holding for a shorter period, but it's difficult to determine the coupon values relative to the fund values.

Thanks!

Aegis

Porcupine wrote: »

Now, I don't quite understand charges. There's the distribution yield, which is the projected earnings over 12 months based on the current price of the fund. Then there's the underlying yield, which is the distribution yield minus charges. Am I right so far?

You're right on the distribution yield, but the underlying yield is the income received to the fund from the holdings (i.e. the gilts and bonds). The fund manager can then either retain income within the fund, resulting in a lower distribution than underlying yield but with potentially higher capital growth, or he can use existing retained funds or sell some of the capital growth to increase the distribution yield.

ses6jwg

Ishares currently offer a High Yield ETF paying around 4% in dividend yield.

Its basically a fund made up of the highest paying FTSE companies, I think the largest holding is United Utilities at 2.3%.

Maybe worth checking out?

I'll be putting some into my ISA come April.

sabretoothtigger

my retirement fund (although, I've got about another 30yrs of work ahead of me!!)...

I'm not too keen on tying the funds up for more than 12 months, volatile times etc, and I also like to invest in small business opportunities.

I think thats contradiction. Theres no investment for less then 12 months, thats trading and you might get 6% return from shares maybe, some high div ones seem quite low risk and theres a reasonable chance the capital will be returned over 12 months


Bonds or gilts seems high risk to me as their prices have been rising for many years and might not in future

smaller time frames increase risk

ses6jwg wrote: »

Ishares currently offer a High Yield ETF paying around 4% in dividend yield.

Its basically a fund made up of the highest paying FTSE companies, I think the largest holding is United Utilities at 2.3%.
.

The ftse all share itself was yielding 4% in august and its about 3.1 now. Might as well go for the lowest cost tracker if thats the aim


Right now ft100 is 2.8 so include costs or ter if considering yield.

http://www.legalandgeneral.com/investment/fundprice1_index.jsp


Gilts are 4% which is close enough to make me think those gilts are over priced for their risk. Index linked gilts is a better idea but appear to be lower yield however its better value imo, you may see capital growth over 12 months