Holding cash in pension fund

grey_gym_sock

Filo25 wrote: »

Just giving this one a bit of a bump, as I was looking at my SIPP performance recently and really starting to question whether I would just be better off moving my bond holdings into cash, am I mad?

As volatility has picked up in the market, bond funds don't generally seem to have benefited from a flight to quality in most cases, most bond funds have taken a hit, probably not true of short dated government bonds but the return on them is so small that it will be eaten up by management and platform fees anyway, so I can't see an economic case to hold them at present.

well, the yield to maturity (YTM) on the shortest UK government bonds is now c. 0.8% - see the last column in this table - http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 - that's higher than it was 4 months ago (prices have fallen a bit, making the yield rise). that might now be enough to cover management + platform fees and leave a little for you.

My concern at present is that bonds have lost the supposed historical benefit of moving counter to equity movements in a correction, and their only real diversification benefit looks to be to fall slower in any significant correction, rather than to help offset it.

for one thing, if you're looking at bonds funds, it depends what kind of bonds they're holding. the feature of moving in the opposite direction to equities in a correction is something you might expect for gilts, but not so much for corporate bonds, which are more likely just to fall more slowly.

but even for gilts, they don't always go in the opposite direction in a correction. often enough to make it interesting, but not always. some gilts have fallen a bit recently (see above), but it's not obvious what will happen next.

meanwhile, corporate bonds probably aren't negatively correlated with equities, but some quite cautious corporate bond funds are on yields approaching 3%, which is more than cash - of course, that's also with more volatility than cash, so you get what you pay for.

If that rather bearish view of bonds prevails for the next few quarters is there any reason I shouldn't just be in cash, and at least avoiding platform charges.

Obviously things will change as rates rise so at least short dated government bonds may become economically viable investments again, but this really doesn't feel like a great time to be holding bonds to me as an inexperienced investor, I would welcome any thoughts from anyone on whether I am missing something!

don't be too influenced by recent moves in bond markets. concentrate on what we do know. short-term government bonds are always quite similar to cash - it's a relatively marginal decision which of the 2 to use. longer-term governments bonds and corporate bonds each give you slightly different things: each might usually be expected to give somewhat higher returns than cash, but in exchange for taking on a bit of risk.

(i'm not very keen on long-term gilts, currently on yields of 1.8% at most. however, a small amount in them could add diversification to a portfolio.)

Filo25

grey_gym_sock wrote: »

well, the yield to maturity (YTM) on the shortest UK government bonds is now c. 0.8% - see the last column in this table - http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 - that's higher than it was 4 months ago (prices have fallen a bit, making the yield rise). that might now be enough to cover management + platform fees and leave a little for you.

for one thing, if you're looking at bonds funds, it depends what kind of bonds they're holding. the feature of moving in the opposite direction to equities in a correction is something you might expect for gilts, but not so much for corporate bonds, which are more likely just to fall more slowly.

but even for gilts, they don't always go in the opposite direction in a correction. often enough to make it interesting, but not always. some gilts have fallen a bit recently (see above), but it's not obvious what will happen next.

meanwhile, corporate bonds probably aren't negatively correlated with equities, but some quite cautious corporate bond funds are on yields approaching 3%, which is more than cash - of course, that's also with more volatility than cash, so you get what you pay for.

don't be too influenced by recent moves in bond markets. concentrate on what we do know. short-term government bonds are always quite similar to cash - it's a relatively marginal decision which of the 2 to use. longer-term governments bonds and corporate bonds each give you slightly different things: each might usually be expected to give somewhat higher returns than cash, but in exchange for taking on a bit of risk.

(i'm not very keen on long-term gilts, currently on yields of 1.8% at most. however, a small amount in them could add diversification to a portfolio.)

Many thanks for a really useful response, which has certainly given me something to think about on the matter, any recommendations on funds that handle short duration gilts? I had looked at options like the JP Morgan liquidity fund (not gilts I know!), but the return there is still too small to hold at present

I would definitely be interested in investigating further, the only downside is that at present I'm on HL, not exactly a low cost platform, and you really feel that fee when it comes to investing in lower return assets. Although if the expected rate rises come through this should become less of an issue.

As you say the problem I have had is looking at well regarded strategic bond funds, which in the current environment will always have a fair amount of high yield stuff in there to drive any kind of return at present, and you are right that will always get hit when the appetite for risk falls.

grey_gym_sock

Filo25 wrote: »

any recommendations on funds that handle short duration gilts?

i don't know of any good open-ended funds, but 2 possible ETFs are:

SPDR Bloomberg Barclays 1-5 Year Gilt ETF (GLTS)

iShares UK Gilts 0-5yr ETF (IGLS)

both those ETFs have YTMs around 0.9%, which is in line with the short gilts they hold. however, i'm a bit puzzled that they've both only distributed around 0.4% in the last year .... anybody know why?

(with HL, you'd have a dealing charge to buy an ETF, and then a holding charge that start at the same 0.45% as for funds, but is capped at £200 for a SIPP.)

bowlhead99

Filo25 wrote: »

I would definitely be interested in investigating further, the only downside is that at present I'm on HL, not exactly a low cost platform, and you really feel that fee when it comes to investing in lower return assets. Although if the expected rate rises come through this should become less of an issue.

I know this doesn't answer your question, and apologies if you've already covered it in other posts/threads ; but on this point about HL not being a cheap place to hold funds - I can see that them taking almost half a percent is going to feel painful when returns are not very high on things like short dated bonds.

So, what's the reason you need to stay with HL, other than a bit of apathy due to hassle of moving? They're taking that same figure from your other higher-performing funds too, even if it's not so noticeable when you have more yield to 'spare' on paying fees. So it can be an expensive place to be.

If your answer is just that you don't have a lot of motivation to move to a lower-percentage-based or transaction fee-based platform because really, the absolute amount of money you're talking about isn't very high, so 0.45% of it isn't a lot of pounds being spent on fees - then there's no real issue paying that "not a lot of pounds" on lower yielding assets, because really, it's not a lot of pounds. Whereas if it *is* a lot of pounds then you might be better suited to someone else's platform.

In other words, the "ouch this platform fee is expensive if my return is low" problem is not an issue with the bond or cash funds you're looking at, but more of a 'big picture' problem of the platform itself. All your other funds will have low return years, flat years and negative years so a high platform fee percentage is an issue for them too, it's just an issue that's masked during years that the good times roll.

To avoid the fees at HL, you have to cut down your investment choices and limit yourself to certain things that don't attract the fees (like ETFs or other exchange-traded stuff above their fee cap). If you don't want fee-avoidance to drive your choices, it makes sense to use a provider which is more neutral on fees across investment types (ie lower %, fixed fee instead of %, or blend of the two).

Sorry to derail the thread by not recommending a bond fund nor a cash account SIPP provider but if you're worried about returns there is a holistic 'total cost of ownership' issue which often gets ignored when returns are strong and is only thrown into sharp relief when we try to change our strategies or consider the properties of different asset classes etc.

chucknorris

Filo25 wrote: »

I'm on HL, not exactly a low cost platform

I invest with HL and I think that they are unbelievably cheap, other than the spread and £11.95 for buying or selling, I only pay an annual charge of £245 (0.027%) on £900k investments. £200 cap on my SIPP, £45 cap on my ISA, and no annual charges on my ETF's in the Vantage share and fund account. It will be even better value when I eventually sell my properties and invest the equity with HL.

bowlhead99

chucknorris wrote: »

I invest with HL and I think that they are unbelievably cheap, other than the spread and £11.95 for buying or selling, I only pay an annual charge of £245 (0.027%) on £900k investments

Your right, they're undoubtedly cheap if you have a hefty overall asset value and happy to use ETFs, ITs etc to avoid the platform fee on the open ended funds.

Their reputation for being "reassuringly expensive" (or just downright expensive) comes from the fact they built a huge amount of assets under admin as a DIY "fund supermarket" platform with about the highest percentage-based charge in the sector on the open ended funds they promote. No high volume mainstream provider for DIY or intermediary platform services that works on a percentage of assets basis, tries to charge as much as a full half a percent ongoing fee on funds these days post RDR/ platform review- so their 0.45% is as close as anyone gets to that high a rate.

If you don't want funds and are happy with ETFs/ ITs and direct individual holdings of exchange-traded stuff, they're not too bad at all if you have large holdings - as the transaction fee or account admin fee on the example ETFs that grey gym mentioned, will round down to a very small proportion of your assets.

Filo25

Bowlhead, I actually had been asking for recommendations on platforms on here recently, in an ideal world I would like someone with HL levels of service/software and financial security without their hefty fees, I am largely in OEICs at present, although as a noob my investments are still in a bit of a state of flux, for a start I need to seriously start rationalising the crazy number of holdings I have).

It probably makes sense for me to stay on HL in the short term at least due to the lack of trading fees while I gradually decide on a portfolio which I am comfortable with, after that I am however open to recommendations, potentially I may move another old work pension in there so could have say £170k in there, not huge by the standards of some one here I know but certainly enough for me to both want to minimise fees, but also even more importantly to be comfortable in the software, service levels and financial security of the platform.

Open to recommendations!

kidmugsy

The Cavendish Online pension seems to offer 0.25% p.a. on cash holdings (if I understand it correctly).