Bond funds

Surreyboy

Hi

I was looking at investing in a bond fund, as most of my investments are in shares & I need to diversify a bit.

I was thinking of investing in the Fidelity Strategic Bond fund, which seems to be a conservatively run fund (and so quite good as a core holding), which has performed quite well. The TER is also not too high. However, I was just slightly concerned about the size of the fund. I have seen quite a few articles recently about how larger, less 'nimble' funds perform worse than smaller funds.

The Fidelity fund is £1.5 billion. At the same time, I understand that in 2013 it won the Money Observer Bond smaller fund award?! I don't know that much about bonds - is £1.5 billion not particularly excessive for this type of fund?

Has any one got any other recommendations? I was also looking at a SPDR corporate bond ETF, but if bonds are about to crash, I thought the flexibility of a strategic bond fund might be a good idea.

Thanks!

kidmugsy

If I wanted bonds in my ISA I think I would ignore corporate bonds and buy a Gilt - say a five-year one. If I wanted inflation protection then I'd fancy American TIPS, which I gather I could buy in an ISA in the form of an ETF of them.

The beauty of a Gilt held until maturity is that you know what you're going to get and when you are going to get it. On the other hand, the yields do look lousy, don't they?
http://markets.ft.com/research/Markets/Bonds

On the third hand, why do I think I know better than the market?

(Answer: because unlike pension funds, banks and insurance companies, I am not virtually coerced into buying Gilts.)

bowlhead99

1) If a fund is making the strategic decisions for you, on what types of bonds to hold during what economic conditions, then you would want to get performance data going back to the mid 90s before the crash in 2000-2003 (dotcom bubble, 9/11, Enron etc) and the credit crunch 2007-2009, to see how they performed in those periods together with how they performed in the various boom periods in between.

So, I hope you are looking at 10-15 years of data rather than 4 years of data when you conclude "it has performed quite well". If not, accept that your judgement is a guesstimate.

2) I generally ignore awards as in the world of financial services it is quite easy to obtain awards by sponsoring events, by it being your turn being 'flavour of the month' while the award is in progress, etc. If you have the time and energy you can dig out what type of assets were the main holdings of a particular fund at what times and how they performed and attempt to decide for yourself whether those returns were by luck or judgement with the benefit of hindsight.

3) Yes smaller nimbler funds are typically able to exploit opportunities better. The global bond market overall, which includes government gilts and other sovereign paper, is larger than the public equities market. So a billion pound fund compared to trillions of dollars of opportunities is not necessarily an issue.

Clearly of course a billion pound fund won't improve its returns appreciably by spotting a great target for a few more basis points on an opportunistic £2m deal, but then a strategic bond fund is not trying to grab every individual smallcap opportunity that passes - it is trying to be in the right asset classes at the right time: government bonds at home or overseas, investment grade corporate, high yield corporate, international etc etc.

Personally I hold M&G optimal income in more than one of my portfolios as the strategic bond choice. Has worked OK so far over a reasonable time period. But there are obviously plenty of other choices out there.

As Kidmugsy infers, the returns from individual bonds and gilts held to maturity will likely diverge from funds that hold a portfolio of bonds and gilts and so it is important to know what you want and why, which depends on your values and goals and the state of other assets in your portfolio.

planteria

any thoughts on the Royal London Extra Yield fund?

Surreyboy

Thanks for the advice.

In terms of what I am trying to achieve, it's mainly to diversify (my investments currently are mainly in equities with a small amount in property). I don't know much about fixed income yet, but I picked a strategic bond fund to give more flexibility in the event that bond prices crash. I've read that gilts are more vulnerable here, as they pay lower interest in return for the higher security.

In terms of size, the M & G optimal Income fund is about £20 billion I think?

I only referred to the Money Observer Award because of the 'smaller fund' tag.

Thanks guys

Sobryma

Personally I would go for a short duration bond fund to diversify but minimise the risk of a big sell off. Maybe something like SWIP Defensive Gilt, Fidelity Global Index Linked, Vanguard Short Term Inv Grade Index etc.

Mirno

kidmugsy wrote: »

If I wanted bonds in my ISA I think I would ignore corporate bonds and buy a Gilt - say a five-year one.

Do ISAs still have the minimum of 5 years to maturity requirement?
Now we're in the NISA age, and you can transfer in both directions (S&S ISA back to cash now too), it makes much less sense but I don't know if that rule has been repealed.

Mirno

kidmugsy

Mirno wrote: »

Do ISAs still have the minimum of 5 years to maturity requirement?

Nope. Very welcome: apart from anything else it makes it possible to leave "dividend reinvestment" running when a bond falls below five year maturity, should one wish to.