Bonds / Fidelity Moneybuilder Income.... still safe?

edited 1 February 2015 at 5:45PM in Savings & Investments
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seismic99seismic99 Forumite
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edited 1 February 2015 at 5:45PM in Savings & Investments
Anyone out there have any thoughts on holding bonds right now.... in particular the Fidelity Moneybuilder Income fund (GB00BBGBFM09)... which is listed as a conservatively-managed, high quality, investment grade corporate bond portfolio!!

I put a small portfolio of funds together last year on recommendation from a friend... the Fidelity Moneybuilder Income fund was included as a fairly safe cautious fund, however, it has increased in value by about 12% since I first invested in it and outperformed everything else I hold including some of the riskier funds.


If it's not already apparent, I don't fully understand how bonds work, although appreciate how they are intrinsically linked to interest rates (amongst other things?) This fund just seems to go from strength to strength and have since invested more money in the fund. With any hike in interest rates probably still 12 months away.... is this fund still a safe haven for my money?? When interest rates do eventually go up what sort of impact is this likely to have on the fund price? Also (really showing my ignorance here) what effects the price of a fund such as the Fidelity Moneybuilder on a day to day basis... it certainly doesn’t seem to follow the sentiments of the footsie. What other circumstances could result in a 10 to 15% or greater instantaneous drop in price of such a fund??

Any comments welcome.
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  • Distorted_VisionDistorted_Vision Forumite
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    Important key thing to remember here is that bond prices have an inverse relationship with interest rates. So when interest rates eventually do rise, bond prices will fall.


    http://www.thisismoney.co.uk/money/investing/article-2841231/CHRIS-IGGO-goes-comes-rates-eventually-rise.html
  • edited 1 February 2015 at 1:19AM
    seismic99seismic99 Forumite
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    edited 1 February 2015 at 1:19AM
    Sure... I do understand the fundamental relationship between bond prices and interest rates. However, it seems quite likely that UK rates will not rise until much later in the year or early next and when they do go up it is extremely likely it will be only by 0.25%. When it happens it's not going to be that much of a surprise.... so with that in mind is it possible to anticipate by how much the price of a fund will fall???

    My other question is apart from interest rates what other circumstances could result in a rapid decrease in the price of the bonds?

    And while I'm at it.... looking at the info on the H&L website the Moneybuilder fund has gained by 14% in the past 12 months, however, in the 12 months prior to that it only gained 2.6%. Why was the period two years ago so poor compared to the last 12 months.... surely any hike in an interest rate rise was even more unlikely back then??
  • C_MababejiveC_Mababejive Forumite
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    It will be a long time before interest rates rise significantly. I hold bond funds and i think they provide more stability and security than the current overcooked equities market for now..
    Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..
  • edinburgheredinburgher Forumite
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    It will be a long time before interest rates rise significantly. I hold bond funds and i think they provide more stability and security than the current overcooked equities market for now..

    And more performance over the short term (i.e. the end of 2014) if my S&S ISA statement is to be believed. I purchased an investment grade corporate bond fund to balance my 100% equities pension and it has outperformed the rest of my holdings. Have to say I was flummoxed, I expected it to go the other way.
  • A_Flock_Of_SheepA_Flock_Of_Sheep Forumite
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    I have for a while considered buying into this fund. The word I keep or kept hearing was that bonds are a bit of a time bomb and are overvalued but they seem to be performing. And I like c_Mabebejive's words on overcooked equities.

    I need to spend some time to properly understand how bonds work.
  • mike88mike88 Forumite
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    When interest rates rise the price of bonds tends to fall. However if a bond price falls the income from that bond tends to rise and it is this fact which gives investment stability.
    Take my advice at your peril.
  • talexusertalexuser Forumite
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    I have this fund on my watch list for next rebalancing. At the moment I have M&G Optimal Income, which I have been happy with for some years. In normal times my previous bond funds went up when equities fell, and vice versa, but never gave the total return of equities long term, but were a buffer in a big crash (eg 92, 97, 00, 02, 08).

    Unfortunately we are not in normal times, markets are not working, they are on drips kept alive by central bank intervention and money printing. There is no real historical precedent to predict what will happen when this stops, if it ever will (cf Japan). However the bull has run since 2009, so perhaps the chances are a correction will be sooner rather than later?
    http://www.telegraph.co.uk/finance/economics/11322623/Ten-warning-signs-of-a-market-crash-in-2015.html
  • guymoguymo Forumite
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    For an individual bond, the inverse relationship between interest rates and value is more or less expressed by the bond's duration. A bond with a duration of 8 years will tend to lose 8% in value for every 1% that interest rates rise. The value of the bond will then increase slowly over time as the maturity date nears; again, for a bond with duration of 8 years, with no further interest rate changes you would expect the value to recover in 8 years. (Note that duration isn't the same as maturity date and has to do with the timing and size of the coupon payments.)

    The fund you mention has an effective duration of 8 years or so, according to Morningstar; this is something like a weighted average of the durations of the holdings -- again that's not quite right but close enough to get an understanding.

    So you would expect this fund to lose 8% in value for every 1% rate rise. However, with bond funds, as opposed to individual bonds, there is a wrinkle: as rates rise, investors may sell units of the fund, and the fund manager then has to figure out what holdings to sell and how to reposition the fund. That means that the behaviour of the fund is not so clear cut when there are significant market movements. Nevertheless the above should be a good first approximation.

    A Vanguard study (that I can't find now!) showed that the long term performance of bond funds was closely predicted by the yield of the fund: over the long term, capital value moves around with interest rates and recovers to par as bonds mature or are otherwise disposed of at fair value, and what you are left with as return is the yield.

    So if you're holding for the long term, don't fret over interest rates.
  • C_MababejiveC_Mababejive Forumite
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    I'm no expert. My favourite bond fund is the M&G strategic corporate bond fund.

    GB0033828350

    I first bought into it in August 2012 and i am very happy with its steady performance with low volatility.

    Call me stupid but with so much debt around,why not buy some of it as long as its good quality debt backed up by solid company/assets?
    Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..
  • ColdIronColdIron Forumite
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    I'm no expert. My favourite bond fund is the M&G strategic corporate bond fund.
    One of my solid performers as well but despite its name it's not a strategic bond. Also worth looking at M&G Optimal income, run by Richard Woolnough as well, which is
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