Bonds newbie

grey_gym_sock

ams25 wrote: »

How do you view strategic bond funds, e.g. M&G optimal or Twenty Four dynamic? My objective with bonds is the usual portfolio diversification and something to sell in an equity down market. Would be happy with a real return of 0%, any more is a bonus.

i'm not a huge fan of idea of strategic bond funds. generally, they can hold all the same kinds of bonds that more specific bond funds could hold (gilts, corporate bonds, high-yield corporate bonds, overseas bonds, etc), but they may also be allowed to do a few more risky things, such as shorting bonds, betting on currency movements, or (less exotically) holding non-sterling bonds without hedging the currency back to sterling (rather than the more cautious approach - for a UK-based investor - of either sticking with sterling bonds, or hedging all non-sterling bonds back to sterling).

it does depend how these funds are run, though. some of them may not be trying to take lots of risks.

i don't know about the specific funds you mention.

in general, i'd go with passive funds to hold gilts, since there's very little room for active managers to add value here.

if you're not pushing for high returns from bonds, then a decent chunk of your bonds in a gilts fund probably makes sense. by itself, that may give a lower return than inflation, so perhaps put a smaller amount in a corporate bond fund in an attempt to push the overall return up a bit.

for corporate bond funds, you could argue for active or passive funds - i think there's perhaps more case for active management here than for shares. but i'd prefer a specific corporate bond fund than the more general remit of a strategic bond fund.

one issue with passive corporate bond funds is that, if it's a fund holding investment-grade bonds (generally, the safer bonds), then when a bond the fund is holding is downgraded to below investment grade, the fund has to sell it immediately - as do other similar funds, and hence the price crashes before they can sell. an investment-grade fund usually has few actual defaults on the bonds it holds, but may have noticeable losses from selling downgraded bonds. and some studies suggest that these "fallen angel" bonds, although risky, represent good value after their prices have crashed.

so that is one reason why it might be better to use an active corporate bond funds, where the manager has a remit which allows them to hold both investment-grade and non-investment-grade (high-yield) bonds. (or a reason to buy individual bonds yourself.)

Thrugelmir

ams25 wrote: »

With all the doom and gloom you read about bonds its sometimes appears like it's a one way bet with a guarantee of a capital loss. I also agree re interest rates...increases in the short term more likely to be at a slow pace and reasonably limited.

Some forms of "debt" (which is what a bond is) carry variable rates of interest. Therefore not all doom and gloom. An understanding of what you are investing in is key in making a decision. We live in a world where yield is king. Yet little account of risk gets factored in.

Malthusian

justme111 wrote: »

intetesting. I wondered if we go back more than 30 years and/or use longer timeframe than 10 years ?

I did go back more than 30 years, 1972 was 45 years ago. Over longer timeframes it will look even worse for gold because the success rate of the stockmarket will go up as reinvested dividends make up for the poor periods of price return, while the success rate of gold will probably look about the same. Someone else can run the numbers though.

coastline

chucknorris wrote: »

I can't even find one savings account that pays more (net) than inflation (for a significant amount), so I think that I am going to have to be more heavily invested in equities, which would make my retirement portfolio look something like this:

60% shares (excl VCT)
25% fixed pension (DB and state, might be able to get up to 25%)
4% investment property
4% cash (regular savers/NSI cert/some savings acc)
5% P2P (possibly)
2% VCT (possibly)

The link between inflation and base rates has well and truly been broken and doesn't look like returning soon..

https://www.economicshelp.org/blog/1765/interest-rates/real-interest-rates/

If not bonds you could pick out a number of decent dividend payers on a 10 year view.This should give a cushion if there's a fall in value ? Yes I understand its not everybodys idea of risk..

http://www.dividenddata.co.uk/dividendyield.py?market=ftse100

http://dividendchampions.uk/

chucknorris

coastline wrote: »

The link between inflation and base rates has well and truly been broken and doesn't look like returning soon..

https://www.economicshelp.org/blog/1765/interest-rates/real-interest-rates/

If not bonds you could pick out a number of decent dividend payers on a 10 year view.This should give a cushion if there's a fall in value ? Yes I understand its not everybodys idea of risk..

http://www.dividenddata.co.uk/dividendyield.py?market=ftse100

http://dividendchampions.uk/

Thanks I'll have a closer look when the Friday wine wears off.

Thrugelmir

coastline wrote: »

The link between inflation and base rates has well and truly been broken and doesn't look like returning soon..

The BOE is mandated to target 2% inflation. A 0.25% before Xmas seems very likely. If the BOE's forecasts suggest that longer term higher levels of inflation will persist.