Portfolio & Corporate Bonds

lemon26

Hi, I've got a question about the balance of my portfolio as I've seen on varios sites that it may be an idea to get out of corporate bond funds so I was wondering why?

I have quite a chunk of my portfolio in one, my portfolio is:

Artemis Strategic Assets Acc 21%
HSBC Pacific Index Acc 2%
Invesco Perp Corporate Bond 22%
Invesco Perp High Income 23%
JPM Natural Resources 4%
Jupiter Financial Opps 10%
Jupiter India 4%
Jupiter Int'l Financials 10%
Threadneedle UK Property Trust Acc 4%

Should I decrease my exposure to the corporate bonds and move some into the Pacific Tracker to increase regional diversification? Any thought sin general on my portfolio - I would judge myself to be adventurous and don't mind the 'downs' to get the higher 'ups'!

Thanks, L

dunstonh

I've seen on varios sites that it may be an idea to get out of corporate bond funds so I was wondering why?

High yield bonds still have some potential value. Normal bonds dont have the potential that they did a year ago. However ,you dont buy corp bonds to get that sort of 1 in a 20 year buying opportunity. You buy them to provide an income and reduce the risk of your portfolio (assuming you buy lower risk versions). Then when you rebalance you use the bonds to either feed the equities and property (or vice versa).

Should I decrease my exposure to the corporate bonds and move some into the Pacific Tracker to increase regional diversification?

and increase the risk of the portfolio in the process. Do you want to increase the risk?

lemon26

Thank you for your reply Dunston, how is the Invesco Perpetual Corporate Bond in terms of high / normal yield? I would class it as a low-risk bond too but is that a correct assumption?

As I've done it myself, how is my portfolio positioned or, more appropriately, what am I missing? I've got a lot of equity exposure, some bonds and commodities and some property - is the property a good idea? If so, how much would you typically hold in a portfolio?

Thank you once again, L

FATHEROFTWO_2

Run the portfolio through the morningstar portfolio xray tool.

Then compare it to something like the jupiter merlin growth fund and compare the exposure and risk profile

jamesd

The reasons to consider decreasing corporate bond holdings are:

1. Many moved into them to get increased safety when afraid of equities, so capital values may decrease as they are sold to move back into equities.
2. Concern about the impact of inflation, which would decrease the capital value of bonds.
3. Normally on the way out of a down cycle and in recession recovery corporate bond capital values would be expected to fall.

So the risk over the next year or so is that the capital value will drop and some take the view that it's safer in the short term to reduce corporate bond holdings. High yield bond funds are less likely to be affected because those are higher risk areas that people may move into from the lower risk corporate bond funds.

The trouble with that is that if you shift from bonds to equities and if equities drop, you'll see more of a drop than you would have seen in bonds. If equities drop, bonds would normally rise, so they can cushion against that.

So you need to balance the two types of risk, one the speculation that capital values may decrease, the other the traditional role of bonds in cushioning drops if equities fall as part of a balanced portfolio.

The Invesco Perpetual Corporate Bond is part of the UK corporate bonds sector so it's at the long term lower volatility end of the spectrum that is likely to be at the higher risk end of short term capital drops.

Commercial property is a good idea and looking at your mixture I'd personally be inclined to swap half of the Invesco Perpetual Corporate Bond holding into commercial property funds that hold real property, like Threadneedle UK Property Trust, as distinct from property shares. That's because the commercial property market is bouncing around fairly low values already, while high grade corporate bonds are more at the higher end of valuations at present. Selling high and buying low is likely to be a decent idea given some time for recovery to happen.

lemon26

Thank you all for your opinions, I was inclined to switch half of the corporate bond out into another fund / asset class and I was thinking about inceasing my holdings in commercial property too.

I have read that a portfolio should be made up of a few core holdings with a number of smaller holdings, the smaller ones being the riskier assets, such as commodities and specialist funds so if I switch half of the Corporate Bond, that will leave me with 2 holdings of around 25%, 4 of around 10-15% and 3 of <5%. Will I be to thinly spread to see the benfits as I'll lose out by paying more in fees etc?

jamesd

You wouldn't normally pay higher fees for having more holdings if you use a fund supermarket like Hargreaves Lansdown. The fees there are just a straight percentage of the holding value with for some funds a 0.5% or less cost charged by the fund manager for buying that isn't discounted to zero, for many it is zero. So assuming you're using a place like that there's no reason not to spread the money around.

lemon26

Hi James, I'm with Fidelity as their minimum investments are £250 for lump sums and £25 for monthly savings - less than H-L even though I have to pay fees with Fidelity. Once the mortgage is paid and I have more to save a month I may move to H-L but am taking advantage of low mortgage rates at present with the majority of my spare cash.

In your post yesterday, at 2340, is the reason that you've included the Threadneedle fund simply because I've already got some holdings or for any other reason?

Thank you, L

purch

High yield bonds still have some potential value

I don't agree with that point Duns

If you look at the yields in isolation, in general, lower rated paper yields are quite low considering where we are in the economic cycle, and the risks that still exist going forward. As a spread over Gilts or other Government securities, then yes they do look cheap, but the prices of Gilts are artificially high currently due to the QE program, and I think we need to reassess what should be considered the 'normal' spread.

ozzage

I had holdings in two pure corporate bond funds, but I've just moved them into M & G Optimal Income as I've decided I can't predict what's going to happen with bonds now and I'll leave it up to the expert...

jamesd

lemon26 wrote: »

Hi James, I'm with Fidelity as their minimum investments are £250 for lump sums and £25 for monthly savings - less than H-L even though I have to pay fees with Fidelity.

The workaround for that at HL is to buy one fund then do a sell-split transaction. You can split the sale proceeds into say £25 of each fund you want to buy if you like. Maximum of five funds being bought per sale. Once you have any amount held in a fund the minimum purchase limit at HL falls to £250.

lemon26 wrote: »

In your post yesterday, at 2340, is the reason that you've included the Threadneedle fund simply because I've already got some holdings or for any other reason?

No other reason, just because you already have it.