Bond fund diversification?

Lomcevak

I'm contemplating asset allocation in a 60/40 share/bond split S&S ISA on the Vanguard platform, 15 year horizon.

A very simple way to do it would be 60% VWRL / 40% VGOV, and I've seen that pairing mentioned before. However, I'm wondering if there's a need to diversify the bond holdings a bit. E.g. I could do 20% VGOV, 10% VUTY, 10% VUCP. That would give exposure to UK gilts, US treasuries, and US corporates, for example - would that be beneficial? Or not worth the effort?

I get that it would introduce currency risk as VUTY and VUCP are dollar-denominated.

redpete

Why doesn't VLS60 give you what you want?

Lomcevak

redpete wrote: »

Why doesn't VLS60 give you what you want?

I was trying to keep the problem simple - i'm more interested in understanding aspects of asset allocation than looking for specific funds at this point.

Saying that, in my SIPP VWRL/VGOV would be much cheaper than VLS60 as ETF platform fees are capped, funds aren't.

Thrugelmir

What's your objective? 40% GILT allocation is very conservative at current yield levels. VWRL only yields just over 2% as well. Global equities would have to perform well to generate a decent level of capital growth to compensate.

Lomcevak

Thrugelmir wrote: »

What's your objective? 40% GILT allocation is very conservative at current yield levels. VWRL only yields just over 2% as well. Global equities would have to perform well to generate a decent level of capital growth to compensate.

I'm exploring a few options for early retirement, and I need something in place that I can be confident will bridge the gap until DB pensions come online. It will be needed in 12 (optimistic) to 15 (pessimistic) years. I have a fair bit in DC pensions at the moment (which are rather equity-heavy) and I'm already using my full annual pension allowance, but have relatively little in S&S ISAs. Barring unforseen circumstances, I can put £20k per year into the ISA as well, so one option is a bond-heavy ISA, which would be more likely to march predictably to where I need it to be over the next decade-and-a-bit.

Saying that, i'm not too set on any particular allocation or strategy at this point, just trying to understand options. I think I understand equity allocation reasonably well, just looking to understand bond diversification, as I don't feel I understand that aspect. The VWRL/VGOV scenario was more me trying to simplify the problem than anything else.

bowlhead99

Lomcevak wrote: »

A very simple way to do it would be 60% VWRL / 40% VGOV, and I've seen that pairing mentioned before. However, I'm wondering if there's a need to diversify the bond holdings a bit. E.g. I could do 20% VGOV, 10% VUTY, 10% VUCP. That would give exposure to UK gilts, US treasuries, and US corporates, for example - would that be beneficial? Or not worth the effort?

Clearly you recognise the foolishness / high risk of putting all your eggs on one basket. That's why you are using a global fund for the equities instead of one which only holds equities from one particular stock market.

So that being the case: on the bond side, why would you restrict your holdings to UK government bonds weighted simplistically to the market value of all the UK government bonds that exist?

Or alternatively- worded: What leads you to believe that they will be the best bonds to select out of all the choices in the world, and you should allocate 40% of your wealth to those ~40 bonds which the UK government happened to issue? What's wrong with UK corporate bonds, and US corporate bonds, and Asia-Pacific corporate bonds, and European corporate bonds? Both investment-grade and high-yield. And government bonds from all those regions too (including index-linked). Oh and emerging markets bonds.

Lomcevak wrote: »

I'm The VWRL/VGOV scenario was more me trying to simplify the problem than anything else.

There is a case sometimes for saying 'keep it simple'. However, to have all your non-equities eggs in the "UK government bonds are the only thing worth buying" basket seems blinkered and/or lazy.

Saying that, in my SIPP VWRL/VGOV would be much cheaper than VLS60 as ETF platform fees are capped, funds aren't.

Investment is about finding the right tools for the job. One of the tools is the platform.

Once you have decided the right investment strategy for you, you can look to see which platform is good to hold it on. If the best /simplest strategy involves using open-ended mixed asset funds (oeics or unit trusts) and your platform is expensive to hold open-ended mixed asset funds, it is not the right platform for the strategy, but that doesn't make the strategy bad, it makes the choice of platform bad.

It sounds like you're not going to be drawing the money out of your SIPP for at least 15 years so the primary concern is using a credible provider who can allow you to accumulate and hold the assets that you need for your objectives at a reasonable cost. That might well not be the provider you originally picked before deciding what assets to hold, because you are only doing that asset choice now, and you didn't know when picking the provider what investments you actually wanted. As they say in the trade, "don't let the tail wag the dog". Decide what you want to buy and hold to meet your investing objectives, and then look where to buy it. If that happens to be the company you're already at, fine. If not, transfer.

short_butt_sweet

vanguard's bond ETFs (unlike their bond funds) don't hedge currency. but many of ishares' bond ETFs have a choice of currency hedged or not.

if you want as much of the bond universe as possible in a single fund/ETF, and want currency hedged to GBP, then you could start with either of these:

- Vanguard Global Bond Index Fund
- iShares Core Global Aggregate Bond ETF (AGBP)

they include both government and corporate bonds, from around the world.

they don't include high-yield bonds (i.e. they only include investment-grade), or index-linked bonds.

but they do cover most (by value) of the bonds it's possible to invest in.

that's not necessarily what you want, but it's a more "neutral" place to start from.

you could add further fund/ETFs for high-yield, or for index-linked.

or if you aren't so keen on overseas government bonds, then instead of using a global aggregate bond fund/ETF, you could combine a gilts fund/ETF (e.g. VGOV) with a global corporate bond fund/ETF (which hedges to GBP), such as either of:

- Vanguard Global Corporate Bond Index Fund
- iShares Global Corp Bond ETF (CRHG)

dunstonh

Bonds should be diversified just like equities.

Generally, you place the main classifications as UK gilts, index linked gilts, global bonds, high yield bonds.

If you took a typical 1-10 risk scale, you could place bond funds between risk 2 and 9. The spread of risk can be that much. Obviously, the target volatility that you are looking for will impact on what types of bonds you use and what weightings.