Current market carnage - anyone selling or buying?

Linton

racing_blue wrote: »

Gadget Mind (and anybody else with a view) please may I ask what do you think about this:

A UK investor, with portfolio held in ISAs, sets out to create a passive portfolio. Their starting point is 60% equity, 40% bonds.

They could simply dripfeed into a lifestrategy fund & sit back.

But hang on, at their starting point interest rates (and bond yields) are historically low. They are concerned that if they invest in a broad market government bond fund, then if interest rates rise the value of their fund may fall.

Rather than risk a capital loss, they look for another sort of safe, fixed income vehicle. Do fixed rate cash ISAs fit the bill?

Cash is fine for reducing the risk, especially at the moment. However one of the reasons for holding a fixed proportion of bonds (or cash) and equity is that you can rebalance between the two buying low and selling high. This is a lot more difficult if they are held in separate accounts, especially if the cash cannot be accessed for a few years.

Yes bond capital values will fall if interest rates rise. On the other hand equity could crash in the meantime. I think without having looked at it too deeply that if the interest rate rise is slow the effect would be relatively small. You can make it smaller by buying short duration bonds. They wont give you much of a return but because their price is dominated by the upcomng maturity date it wont change a lot. As interest rates rise you could steadily increase the duration of the bonds you buy. I would hope a Strategic Bond managed fund would be working in this way.

Thrugelmir

gadgetmind wrote: »

RBS aren't exactly well known for deep financial insights and expert market timing. For example, they bought ABN AMRO in 2007 just before they lost 97% of their value.

The shareholders bought up the rights issue in June 2008.

60% of all M & A deals are considered to fail to add value ultimately.

gadgetmind

Linton wrote: »

I would hope a Strategic Bond managed fund would be working in this way.

Look at the values of various strategic bond funds and you'll see that they all work in very different ways. Some are long X, others short/negative, on Y they may agree, and on Z, well who knows? Some hedge some don't, some like JCBs while others prefer bunds, how do you choose?

I just bought VGOV plus SLXX coupled with ISXF. The latter was to allow for the metric shedload of other bank paper we hold.

gadgetmind

Thrugelmir wrote: »

60% of all M & A deals are considered to fail to add value ultimately.

We do a fair few acquisitions, and I'm on the due diligence team for some on the technical side. I can't think of a single one we regret, and definitely none of those I was involved in.

bowlhead99

racing_blue wrote: »

But hang on, at their starting point interest rates (and bond yields) are historically low. They are concerned that if they invest in a broad market government bond fund, then if interest rates rise the value of their fund may fall.

Rather than risk a capital loss, they look for another sort of safe, fixed income vehicle. Do fixed rate cash ISAs fit the bill?

The 'value of their fund may fall' is all relative because the value that bonds could fall is much less far than the value of their broad largecap equity funds could fall.

Also, the longer dated bonds which would make up a lot of a global bond market tracker have further to fall - ie would be relatively more impacted by rate rises - than the short-maturity stuff. So be careful what you are comparing. There are of course lots of types of bonds, in lots of currencies, including higher yield corporate ones whose prices generically behave more like the equity market than like government bonds, and index linked government ones whose prices already factor in projected movements in their recurring payouts based on expectations of future inflation.

So there is more to life than plain vanilla long dated government bonds. And even if there weren't, people have been saying "there is no space left for price rises in bonds and gilts because the yields are impossibly low and so you are guaranteed to lose money" for several years now while in fact capital growth has continued to happen together with the interest continuing to be paid on time.

If you think that your bond fund of choice is actually a very low yield and an unacceptably high chance of a fall, compared to cash which has a low yield and no chance of a fall, then sure, go to cash... as long as it can readily be exchanged for equities or bonds from time to time and back again, and really take the place of bonds in a portfolio. So for example cash ISAs can work fine alongside S&S ISAs for periodic rebalance purposes, but unwrapped cash -while offering some really good rates for some types of balance with some institutions - does not really work smoothly alongside a SIPP because rules prevent you going back and forth.

Fixed rate cash ISAs are probably less useful because you are making a commitment to lock in to a known rate which means the money is not then flexibly available to move back into equities or bonds when the time is right. Of course, you can legally 'break your money out of jail' by transferring a fixed rate fixed period product to an instant access product and properly liquidate it, but you stand to lose the planned headline interest rate and so best not to factor income into your calculations if you are holding a 'fixed' product that you won't stick to.

The quest for yield without the opportunity of large crashes has been like a holy grail of a lot of investors for a long time now. Some will be using cash as a proxy for bonds and accepting low yield and non-existent upside, while others will have first tried to use up a wide range of non-equity, non-cash instruments instead. Like direct real estate funds for example, or mysterious 'absolute return' funds, or funds or investment companies invested in infrastructure projects, utilities etc which can certainly have elements of equity-like returns but whose cashflows are in practice perhaps more robust than pure equity plays... and might be considered a bit more 'fixed return' than traditional equities and therefore not so correlated to equity prices.

As Gadget infers, most of these are now priced to reflect increased demand in such things, and so the yields are lower, and risk of crashing higher, which doesn't really solve your problem. And his 'stick to what you know' comment is pertinent when looking beyond your comfort zone for things that might take the place of the things that are in your comfort zone.

As mentioned by Linton I prefer strategic bonds to bond trackers as I feel them better able to navigate the waters of interest rate rises... and I'm also keeping an eye on a very broad range of things that are not just straight listed equities but are not government bonds either. I don't have a massive amount of bond exposure at the moment and may get some more here and there - but like Gadget have done well from bank prefs in recent years and am probably still weightier there than I should be in the face of prospective rate rises, so it is more of a case of rotating some money between different non-equities options than switching a lot of equities to a lot of bonds.

tg99

racing_blue wrote: »

Gadget Mind (and anybody else with a view) please may I ask what do you think about this:

A UK investor, with portfolio held in ISAs, sets out to create a passive portfolio. Their starting point is 60% equity, 40% bonds.

They could simply dripfeed into a lifestrategy fund & sit back.

But hang on, at their starting point interest rates (and bond yields) are historically low. They are concerned that if they invest in a broad market government bond fund, then if interest rates rise the value of their fund may fall.

Rather than risk a capital loss, they look for another sort of safe, fixed income vehicle. Do fixed rate cash ISAs fit the bill?

Not available in an ISA obviously, but I'd also look at making sure the various current accounts offering 3/4/5% and Reg Savers up to 6% are maximised as these are attractive returns relative to government bonds given where prices are for the latter at present.

gadgetmind

bowlhead99 wrote: »

As Gadget infers

Ahem "implies".

tg99

gadgetmind wrote: »

Agreed, but people tend to equate complicated with better, which is an image the investment industry does all it can to maintain.

People want the return without the risk.

I understand long and short, calls and puts, negative duration, and the like, but am less than convinced that they have a role for anyone who doesn't particularly care for cornering on two wheels.

All of my bond holdings are also passive. Capital could be knocked by short term volatility, but bond prices have maths behind them, and TBH I'm quite happy to gain from looking for mispricing by those desperate to sell.

I picked up a lot of bank paper back when credit was crunchy, including some bank preference shares that have done *very* well for us.

Perhaps the fact that I find fixed interest fascinating, coupled with zero desire to use CFDs, shows that I have a mathematician's brain rather than that of a gambler.

Yep similar to you in terms of picking up 'cheap' credit after the post-Lehmans meltdown....and these kind of sell-offs where this is a mismatch in liquidity usually provide a great opportunity to add or up exposure to illiquid assets once the liquidity premium has returned and more. Personally, I'm low in bonds at present and sold my high yield exposure a year or so ago but am looking with more interest after the recent spread widening to c700bp (albeit alot of this has been driven by energy/basic material company spread widening given their relatively high concentration in the high yield market). But with more bond funds potentially struggling with big redemptions at some point, and with the resulting liquidity mismatch and fire sale likely to offer a very decent entry point, I think I'll probably continue to hold off for now or just dip my toe in. Third Avenue fund closure recently in the US didn't exactly go down well in markets!

Spurs_2015

As a first time investor I've only got a VLS60 and stay away from single company shares however I haven't changed my strategy due to the current market conditions I'm still transferring £200 each month is this a stupid thing to do in your opinion? At 28 I take the view that any blip in the market now will still equal gains in the long run and I won't need the money for a good few years.

gadgetmind

Spurs_2015 wrote: »

As a first time investor I've only got a VLS60 and stay away from single company shares

Very wise.

I'm still transferring £200 each month is this a stupid thing to do in your opinion? At 28 I take the view that any blip in the market now will still equal gains in the long run and I won't need the money for a good few years.

Keep doing what you're doing and maybe do more,

40% in bonds strikes me as being *very* high for your age, but it's all down to your monkey brain. If you'd look at big falls and panic, stay where you are. If you understand why volatility is your friend, 90% or even 100% of equities will work better for you .