Bond funds - pointless?

Linton

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)?

Depends how and when you bought them and when or if you sell them....

When indexed Gilts are first sold by the government, they are sold for a value, say £100, and a promise to provide an indexed return at maturity in say 10 years together with your original £100.

Now you may chose to sell the bonds before maturity date. You will get a market rate for them. For example, if a lot of people wanted index linked gilts and none were being sold by the government you may be able to get someone to pay you say £100 + accumulated inflation + £5 for one. Someone may be prepared the extra £5 if other interest rates were low and future inflation was thought likely to rise before maturity. OK they wouldnt match inflation, but the return they get at maturity is better than nothing.

As a gilt approaches maturity, its value approaches the return at maturity plus its original cost.

So if you buy on the secondary market and sell before maturity, prices could fall.

mike88

It depends which fund you buy. Old Mutual Corporate Bond (Acc) fund has returned 63% over the last 3 years. Table here:

http://citywire.co.uk/money/fund-and-fund-manager-performance/-/unit-trusts/gbp-corporate-bond/fund-league-table.aspx?CitywireClassID=2258&RankModelID=9

Bond funds are useful if you want to stabilise your risk.

sabretoothtigger

so I'm sitting with 15% in cash as "dry powder"

cash is a form of zero coupon bond allegedly

I think gilt prices will have a avalanche type dynamic to its movements. Lots of false starts and then an impossible to avoid collapse in value

Though I remember in summer of 2008 there was time to short sterling as it fell. If this time Dollar value fell at the same time or even preceded and/or caused our devaluation then it might end up there is no where really to go in fair exchange hence a rush effect

Bond funds are useful if you want to stabilise your risk.

For that reason I hold only foreign currency fixed return funds and I hope the manager has the nouse to negotiate the market turbulence

gilts and gold now seem to be catching the habit.

Both are reacting to currency instability. It'd be more flat valuing gilts vs gold

gadgetmind

sabretoothtigger wrote: »

cash is a form of zero coupon bond allegedly

Yeah, that's kind of how I see it. The cash in my SIPP is "rotting", but my portfolio-wide cash is mostly in NS&I linkers and a few deposit accounts earning about 3.5%.

I am slowly finding things to invest in, but I'm not going to put cash into things that appeal to me less than cash.

deadpeasant

Ark_Welder wrote: »

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%.

Forum-psychotherapy in action: seeing my thoughts in words on the screen makes me feel so much better. I'm going to hang on to my gilts rather than tinker with cash and market-timing.

Re the conventionals, I'm switching from the HSBC index to (10% of) the Vanguard LifeStrategy 80%, so Mr Vanguard can worry about rebalancing my conventionals from now on.

Re the IL, I see that active v. passive management doesn't seem to matter much. L&G IL Idx (TER 0.25%), Royal London IL (0.43%) and Henderson IL (1.19%!!!) seem to give comparable results net of fees. But HL's platform charges are £24/yr on L&G, £12/yr on Royal London and £0 on Henderson.

Lastly, gadgetmind seems not to have mentioned Smith & Wmson Short-Dated CB on this thread. I don't much like its 1% TER, but it seems to offer low-volatility returns that beat easy-access savings, more liquidity than fixed-rate savings, and tax-free interest (when wrapped) for those whose cash ISAs are maxed out. A nice alternative to dry-powder cash for the next round of bargain equities?

gadgetmind

deadpeasant wrote: »

Lastly, gadgetmind seems not to have mentioned Smith & Wmson Short-Dated CB on this thread.

No, but I've mentioned it elsewhere, and the Scottish Widows Defensive Gilts. I hold neither and instead went for two ETFS (SLXX and ISXF) with a slug of Old Mutual Global Strategic alongside. I know a tracker-phile such as myself should eschew the latter, but they seem to favour "Steady Eddie", which suits me just fine.

The IS15 and SE15 ETFs are also worth a look.

Porcupine

gadgetmind wrote: »

Yeah, that's kind of how I see it. The cash in my SIPP is "rotting", but my portfolio-wide cash is mostly in NS&I linkers and a few deposit accounts earning about 3.5%.

Yes, this is one of my gripes in bond v cash comparison. They tend to use base rate, or at best LIBOR, when even now it's possible to get 5-ish% in a term account. Clearly there's a certain degree of risk (compare that savings rates in Ireland are about 4% while under 2% in Germany), but we get a 'free' credit default swap in the form of the FSCS (which has its own risks, of course). But none of these capital risks are anywhere near the same scale as bonds (IMHO).

"limited upside and significant downside" just about sums up my (ignorant) feelings at the moment. Though I can (slightly) see the appeal of high-yield... more like an equity recovery fund, picking the bonds which are unnecessarily bombed-out in the hope of capital appreciation. So essentially similar risks to such an equity fund, only the likelihood of default is a bit less (but, in the current climate, I think not much less). Do high yield funds actually operate like this, or is this wishful thinking?

Articles like this are causing my 'bond bubble' alarm bell to ring. High yield may avoid that, but I'd need to stare at the numbers some more before being convinced.

Ark_Welder

Porcupine wrote: »

Yes, this is one of my gripes in bond v cash comparison. They tend to use base rate, or at best LIBOR, when even now it's possible to get 5-ish% in a term account. Clearly there's a certain degree of risk (compare that savings rates in Ireland are about 4% while under 2% in Germany), but we get a 'free' credit default swap in the form of the FSCS (which has its own risks, of course). But none of these capital risks are anywhere near the same scale as bonds (IMHO).

It is currently possible to beat even 5% by holding certain individual gilts right now, but only so long as interest rates don't fall, haven status for gilts is not lost, and by not holding until redemption. So +5% for a year does beat cash over that term - another reason why institutional investors would put cash into them rather than with even the safest of banks. But, probably not enough of a potential return for a smaller investor to take the risk.

Porcupine wrote: »

"limited upside and significant downside" just about sums up my (ignorant) feelings at the moment. Though I can (slightly) see the appeal of high-yield... more like an equity recovery fund, picking the bonds which are unnecessarily bombed-out in the hope of capital appreciation. So essentially similar risks to such an equity fund, only the likelihood of default is a bit less (but, in the current climate, I think not much less). Do high yield funds actually operate like this, or is this wishful thinking?

Not ignorant: realistic.

High-yield bonds are not necessarily ones that have bombed, they may have been launched with the high yield. They may even trade above par value, just as high-grade bonds can. Their yield is more a reflection of the perceived risk that the bond will default, i.e. either the coupon payments will be missed or the capital will not be repaid. This will be dependent upon how the company (or government) performs, which will probably be influenced by economic conditions. This is where high-yield bonds have a similarity with equities. High-grade bonds, though, are more influenced by interest rates and the outlook on inflation (which might affect interest rates too). These are reasons why holding high-yield bonds does not give good diversification from equities, and this is a reason why the overal credit breakdown of a bond fund should be determined before an investment is made - and should be monitored throughout the term of th investment.

Porcupine wrote: »

Articles like this are causing my 'bond bubble' alarm bell to ring. High yield may avoid that, but I'd need to stare at the numbers some more before being convinced.

Retail investors are usually late to the party, and I tend to see things like the article as a sign that a top is nearer than a bottom. Doesn't always mean that the top is within the next 12 months though!

gadgetmind

Porcupine wrote: »

Clearly there's a certain degree of risk (compare that savings rates in Ireland are about 4%

Irish bank bonds had a nice yield a while back ...

Do high yield funds actually operate like this, or is this wishful thinking?

High yield bonds funds do. When risk is seen as high, capital values are low and yields high, when it all goes risk on, capital should increase.

A good example is the banking preference shares I bought last year. I was picking these up at 20%-40% discount to par, so significant double digit yields. Over the last few days, capital values have soared back close to par, and I expect them to settle ar par+30%.

I could sell,but need more capital gains like I need a hole in the head, so will instead settle for a few £k per annum of tax free income.

gadgetmind

Ark_Welder wrote: »

These are reasons why holding high-yield bonds does not give good diversification from equities

Yup, and the correlation of my assets does bother me, so I'll be back into gilts as soon as they stop scaring me; I don't buy equities when p/e ratios give me a nose bleed and dividend yields are a joke, so I can't see why I should treat gilts any differently!