Bond funds - pointless?

gadgetmind

EdGasket wrote: »

Won't the Index-Linked gilts just keep rising assuming there is always positive inflation which is most likely? Or would they suffer a fall if interest rates rise (though presumably would be partly compensated by rising inflation)?

Gilt prices will fall if either interest rates rise or if everyone perceives that equities and corporate bonds are no longer mega high risk and piles out of gilts and into equities. Under the latter circumstances, gold will drop alongside gilts.

Of course, things could get even more risk off, and equities could drop back to mid summer levels, but gilt yields really don't have anywhere to go, so I'm sitting with 15% in cash as "dry powder" for if we get more juicy equities available at bargain prices.

srcandas

Light hearted interlude :

Reading all the potential downside to Bonds I had a quick analysis.

Back in October I was adding considerable to my investments but was nervous about equities (fearing a Europe colapse) and nervous about cash deposit as it pays b-all. So I put some in bonds as a semi safe haven

So having jumped into an income sterling bond fund (+1.2% in 3 months) I put an odd £5k in two Emerging market bond funds. In 3 months one has grown 4.5% and the other has lost 0.01%. On analysis the funds are very similar.

I'm beginning to lean now towards the fund managers who seem sane and have a good record and worrying less about equities, bonds, or whatever. Just maintaining a spread (minus Europe which I still think will sink ).

Reading your thoughts gadget I am beginning to think guessing the market on a global scale is not for me.

But I do enjoy reading all this lovely stuff so do keep it coming and I'll try not to let my mind get too befuddled. Enjoy your weekend one and all :beer:

EdGasket

gadgetmind wrote: »

Gilt prices will fall if either interest rates rise or if everyone perceives that equities and corporate bonds are no longer mega high risk and piles out of gilts and into equities. Under the latter circumstances, gold will drop alongside gilts.

Of course, things could get even more risk off, and equities could drop back to mid summer levels, but gilt yields really don't have anywhere to go, so I'm sitting with 15% in cash as "dry powder" for if we get more juicy equities available at bargain prices.

Granted conventional gilts will fall in the manner and for the reasons you give but Index-Linked are different are they not because if interest rates are rising, it is because inflation is rising even faster and will boost the IL gilts? Looking back at graphs of index-linked; they only ever seem to have gone up on a long-term trend apart from the brief fall during the worst of the credit crunch.

gadgetmind

srcandas wrote: »

Reading your thoughts gadget I am beginning to think guessing the market on a global scale is not for me.

I agree entirely, and I rarely indulge in any serious dynamic rebalancing based on macro economics, but I've been moving lots of investments and was heavily in cash, and just couldn't bring myself to buy gilts with it.

I also had a fair bit of new cash to invest, so let's just say that for once I was prompted to start playing it a bit tactically.

In retrospect, 2011 was *very* kind to my investments, so let's see what 2012 brings. As I check and recheck my allocations, I'm happy that I'm prepared for everything other than meltdown, and that one's a bit challenging unless you buy guns, MREs and water purification tablets.

gadgetmind

EdGasket wrote: »

Granted conventional gilts will fall in the manner and for the reasons you give but Index-Linked are different

I've read many views on the subject from those far wiser than myself, and they all feel that gilts have varying risks depending on duration and type, but that overall there is limited upside and a fair degree of potential downside. I'm therefore using fairly simple vehicles for corporate bonds but more complex ones (strategic bonds funds and ITs such as Personal Assets and Ruffer) for other fixed interest/hedge.

I'd love to dive into IGLT and INXG but if they scare the experts, then it's surely quite right that they should scare me. OTOH, someone recently said that holding gilts right now was dangerous, but not holding them was suicidal, so maybe that also ought to scare me!

EdGasket

You could always spend the money; then there would be no problem

gadgetmind

gadgetmind wrote: »

I've read many views on the subject from those far wiser than myself, and they all feel that gilts have varying risks depending on duration and type

Some references.

http://www.bestinvest.co.uk/article/13163/How-safe-are-gilts

http://citywire.co.uk/money/index-linked-gilts-time-to-get-out-of-linkers/a557723

http://citywire.co.uk/wealth-manager/can-wealth-managers-afford-to-avoid-gilts-this-year/a557856

http://citywire.co.uk/money/gilt-valuations-absurd-say-henderson-managers/a553315

After reading all of this, I switched to corporate bonds, funds holding a lot of short-dated gilts and high-yield bonds, and also send for some infrastructure funds to act as a volatility reducer.

As it happens, infrastructure is also likely to give a 6%-8% total return over the next few years, but while it's fairly inflation proof, high interest will be detrimental.

Maybe the lesson is that no-one has a clue, never has and never will, hence the need for a multi-asset balanced portfolio!

Ark_Welder

deadpeasant wrote: »

Thanks for interesting thread. My position is not what to buy, but what to hold/sell. About 8 mos ago I invested an inheritance in a broadly Tim Hale style portfolio, with big defensive chunks of Royal London IL gilt and HSBC gilt index (more the former). These have grown so much that they've more than compensated for the equity wobbles of recent months. I used some of the gains to re-balance, i.e. to buy cut-price equities. But I'm not sure what to do with the remaining (substantial) gilt holdings. The Tim Hale voice in my head says stop checking prices online, just go and kick a ball for 15 yrs. But I can't help wondering if a correction is due, and whether I should convert the gilts to cash until such a correction, then buy back in. Is this the fatal market-timing folly of the newbie? I find bonds defeat my brain - how a gilt fund can grow 30% or more annualised is beyond me. When I have a moment I'll study Ark Welder's Vigilante and Pimco links - thanks for these.

If the strategy that you follow is purely to be a passive one that has occasional rebalancing then you ought to try and stick to that going forward. The potential problem with overlaying with another strategy is that you might bring in increased risk - which the original strategy was designed to address - and might not benefit from economic changes going forward. Trying to time markets is introducing a macro approach, and you might just get your timing wrong: even if you were correct in selling gilts now (which may very well be a good decision), how would you know when was the correct time to buy back in? Have a look back at some of the posts made by MrMalkin on this, of if he does still read the forum then he might contribute something here too.


But just in case you are still tempted...

Whilst the IL gilts are probably overpriced right now, they do still offer some inflation protection going forward. But as you bought yours 8 months ago, your protection started from then and not from now. Prices of these going forward might fall back - along with expectations of lower inflation this year - but they should only suffer from substabtial falls if:

• a prolonged period of deflation is expected (which was a fear in 2008/9)
• rises in inflation are low, economic growth is reasonable, therefore better returns can be made elsewhere , e.g. from equities
• HMG is expected to become insolvent - which is a substantially different outcome to being downgraded from AAA status.

Another problem that might affect funds - both active and passive - is that confidence in the UK's ability to service its debts is shaken (without it actually becoming insolvent), so funds (which are more like an individual rolling long-duration bond) perform substantially below the rate of inflation over the period of time that the fund is held.


Conventional gilts are a different issue: all prices will reduce to par value as they approach their maturity date. Again, by a known amout for individual gilts, but on an ongoing basis for a fund. Where there is, perhaps, more potential for a managed gilt fund over a tracker is that the fund manager can alter the duration of the holdings within the fund to mitigate this: shorter-dated should already be approaching par value and should be less volatile moving forward compared to longer-duration. You would need to read the prospectus and annual reports for both tracker and managed funds, though, to see what they can hold and how they operate.


If you did decide to sell the conventional gilts and put the proceeds into cash then you would have capital security, and possibly an increased yield, but you would also have the timing problem of when to move back into gilts.

Assuming that you have a long timescale, keeping the existing index-linked exposure might have greater benefit than selling and trying to time your way back in: think of linkers as a bit like an insurance policy...

Conventionals are a different matter, and might come down to a short-term decision might cause the greater regret: you sell now and prices rise a further 10%; you keep them and prices fall 10%, or 20%. A decision might also be influenced by your reasons for buying them in the first place and the demands of your strategy.

A good 'learn about bonds' section can be found on the following web-site, along with occasional views on bonds, both specific and in general: https://www.fixedincomeinvestor.co.uk/

Try not to get tempted by the opinions made about individual bonds though. At least, not yet!

Ark_Welder

Circumstances that might start the fall in conventional gilt prices: http://www.bbc.co.uk/news/business-16028896

gadgetmind

Ark_Welder wrote: »

If the strategy that you follow is purely to be a passive one that has occasional rebalancing then you ought to try and stick to that going forward.

True, but even Bernstein suggested that dynamic rebalancing (rather than always rebalancing to a static allocation or one determined solely by time to retirement) had merit.

Equities have always shown a tendency to froth and bubble, and gilts and gold now seem to be catching the habit. Timing the top is "never easy" and getting out too early may make for safer sleeping, but does mean you have to bite your tongue at dinner parties when people go on about how well their dotcom shares, house, gold, Japanese equities or gilts have done recently. Oddly, after the crash, said people don't seem to raise the subject quite so often.

I guess the lesson is maybe to consider macro economic factors, and let equities and bonds "speak to you" via p/e ratios and yields, but never to trust them such that you move too far from your chosen allocations.