Drawdown Portfolio - Which Bond Fund?

coyrls

DairyQueen wrote: »

My SIPP is invested in VLS. It is split across 60/80/100 equities (3 investment timescales). We are adopting a different approach with my SIPP as my situation is very different from that of OH. My pension will not be accessed for at least 6 years, and most will remain invested for 10+ years. It is therefore still in the accumulation phase.

Multi-asset funds are problematic for OH as he plans to begin drawdown in 2/3 years. To guard against a market crash within that short period we wish to hold enough funds in low risk investments now to meet our drawdown requirements from that SIPP for up to the next 8 years.

We wish to ring fence the low risk from the high risk, thus the desire to split the SIPP between equities and fixed interest/cash now.

So, should we simply bite the bullet and split 60/15/25 equities/bonds/cash rather than 60/40 equities/bonds?

We have sufficient emergency cash and will continue adding to our 'suspend drawdown, unwrapped cash fund' until OH retires. That part of our portfolio is already ring-fenced for that function and won't impact on how we use OH's SIPP.

[FONT=&quot]Will the 25% TFLS cover your 8 year income requirement? If so, you can create a fixed term account ladder (better interest rates and safer than investment bonds) for your 8 year income requirement. You'll probably find it hard to find account with greater than a 5 year term, so put double your requirements for years 2 & 3 in 1 and 2 year accounts and then put half of the proceeds into 5 year accounts when they mature.[/FONT]

[FONT=&quot]I'm doing something similar and I'm not currently losing out to (CPI) inflation but I know that this is a risk and have other buffers to cover it.[/FONT]
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[FONT=&quot]A further benefit of this approach is that you'll likely pay no income tax for 8 years.
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bostonerimus

coyrls wrote: »

[FONT=&quot]I'm doing something similar and I'm not currently losing out to (CPI) inflation but I know that this is a risk and have other buffers to cover it.[/FONT]
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[FONT=&quot]A further benefit of this approach is that you'll likely pay no income tax for 8 years.
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....yet another benefit might be that your low taxable income qualifies you for some benefits, although the UK seems to have become pretty mean on that front to even people that really need help . Still you may as well try. as I did when I retired in the US.

I left work at 52 and my pension didn't start until age 55 so I put 3 years of spending into various bank accounts. This meant that my taxable income dropped below the poverty level and I qualified for state subsidized heath insurance, electricity and gas, and even food. I took the health insurance because it was the only way to get it in my state and one heating subsidy check before I wrote to the state agency and told them to stop. I refused the food stamps. But the health insurance subsidy saved me $500/month for 3 years.

bostonerimus

DairyQueen wrote: »

So, should we simply bite the bullet and split 60/15/25 equities/bonds/cash rather than 60/40 equities/bonds?

We have sufficient emergency cash and will continue adding to our 'suspend drawdown, unwrapped cash fund' until OH retires. That part of our portfolio is already ring-fenced for that function and won't impact on how we use OH's SIPP.

I like the simplicity of a multi-asset fund for both saving for retirement and also in drawdown with a total return approach. I would not change your equity to bond allocation much, I'd simply take enough cash for your buffer out of the multi-asset fund so if you took out 10% in cash from VLS60 your overall asset allocation would become 54/36/10

DairyQueen

Thanks all.

Plenty of food for thought.

DairyQueen

Having researched, and then scratched my head a few dozen times, I am revisiting this thread in order to elicit opinion on my latest thinking.

I have decided to allocate our pre-retirement portfolio as follows:

Equities = 65%
Fixed Interest = 15%
Cash = 20%

The cash is higher than I had originally planned but will be sufficient to cover a reasonable emergency fund, plus income replacement and/or discretionary spends, for at least the first five years of retirement.

To maximise returns on the cash, OH will crystallise and we will invest some TFC into a fixed term savings ladder.

Analysis of the holdings of our existing portfolio has identified how I need to rebalance in order to meet our target allocations. I use a core passive plus active peripheral fund strategy. Current FA allocations are VLS (passive) and GAM Star Credit Opportunities (active). I am considering the Dodge & Cox Worldwide Global Bond Fund for the remainder of the FA allocation.

Dodge & Cox are new to me. The GBP version of the fund is Irish-based and appears to offer the usual UK investor protection. Morning Star and Trustnet both rate the fund and its aims and holdings appear to compliment our existing FA portfolio and strategy. It is relatively high risk for a bond fund (4) and has a very reasonable OCF for an actively managed fund (0.45%).

All comments appreciated - positive or negative.

gm0

Thanks for posting this feedback and keeping the thread going. As I am interested in researching FI too I took a look at the fund sheet. No experience of D&C though. From earlier comments/exchanges it may be evident I am at a similar portfolio realignment stage to consider rebalance of some equities.

FWIW - Reading the risk description on the D&C GBF site risk sheet about historical returns being overstated due to the presence of a separate private investment co with funds deployed to similar aims to the GBF triggered a question in my mind.

Clearly this could be entirely innocuous - some (small) costs have been shared across a larger portfolio with the "not the fund" bit - and this is the compliance language required to describe it and this has now or may stop. Or it could mean something else. No scale given. Implication clearly that some trading or other fixed costs will have increased relative to the value of the fund at some point and that this will show up as increased drag somewhere/when

So if this GBF is linked in someway with a related UK offered feeder then I would want to know a bit more about that as the risk suggests the historic performance data are not wholly representative of operations forward given the change in circumstances around these shared bigger operations/portfolio costs. It may be nothing significant and just my inexperience with bond fund risk sheets.

My other observation was the skew towards EM BBB, BB mix was a bit racy for me - but it clearly depends what role these particular FI are playing in ones portfolio - short term income cash buffer alternative or something else.

ffacoffipawb

DairyQueen wrote: »

Having researched, and then scratched my head a few dozen times, I am revisiting this thread in order to elicit opinion on my latest thinking.

I have decided to allocate our pre-retirement portfolio as follows:

Equities = 65%
Fixed Interest = 15%
Cash = 20%

The cash is higher than I had originally planned but will be sufficient to cover a reasonable emergency fund, plus income replacement and/or discretionary spends, for at least the first five years of retirement.

To maximise returns on the cash, OH will crystallise and we will invest some TFC into a fixed term savings ladder.

Analysis of the holdings of our existing portfolio has identified how I need to rebalance in order to meet our target allocations. I use a core passive plus active peripheral fund strategy. Current FA allocations are VLS (passive) and GAM Star Credit Opportunities (active). I am considering the Dodge & Cox Worldwide Global Bond Fund for the remainder of the FA allocation.

Dodge & Cox are new to me. The GBP version of the fund is Irish-based and appears to offer the usual UK investor protection. Morning Star and Trustnet both rate the fund and its aims and holdings appear to compliment our existing FA portfolio and strategy. It is relatively high risk for a bond fund (4) and has a very reasonable OCF for an actively managed fund (0.45%).

All comments appreciated - positive or negative.

No Dodge and Cox funds available at Hargreaves Lansdown, but available at AJ Bell Youinvest. Very unusual that. Thought Hargreaves offered everything anybody else did.

bowlhead99

DairyQueen wrote: »

Current FA allocations are VLS (passive) and GAM Star Credit Opportunities (active). I am considering the Dodge & Cox Worldwide Global Bond Fund for the remainder of the FA allocation.

Dodge & Cox are new to me. The GBP version of the fund is Irish-based and appears to offer the usual UK investor protection. Morning Star and Trustnet both rate the fund and its aims and holdings appear to compliment our existing FA portfolio and strategy. It is relatively high risk for a bond fund (4) and has a very reasonable OCF for an actively managed fund (0.45%).

All comments appreciated - positive or negative.

Well, it depends what type of allocation you are looking for, for your fixed interest piece.

The D&CW GBF invests primarily in USD-denominated debt: about 82% at the March factsheet. Would you be investing in the GBP-hedged class (as distinct from the GBP-priced class), or just taking the dollar exposure (which seems like a lot)?

It is also around 30% invested in emerging markets with Latin America featuring heavily. The prospective yield is high- presumably that's what you're looking for. It is mostly a corporate bond fund with under 30% in government or government-related debt (less than half what you'd get from something like Barclays Global Aggregate Bond index); presumably you know all this and are happy that you want to be substantially in BBB debt or lower, rather than government bonds or the highest tiers of investment grade corporate.

The average duration is reduced by a couple of years from its natural position on the underlying portfolio through the use of derivatives. As it's a strategic fund, you can take the view that they know what they are doing and doing what the investors want. But it's important to know what you want.

If you're happy that the GAM Star fund (another relatively high yielding one) gives you most of the GBP debt allocation you want then a small amount in this one could be appropriate to pick up other currencies (primarily USD) - but you may choose to go with the hedged version given your equities will come with lots of overseas currency exposure. It's not a natural or obvious choice simply because they're not a European-based manager, whereas UK investors often stick to more 'local' names, so it would be interesting to know why you prefer it to such other options, though that in itself doesn't make them uninvestible.

They are a US manager running an Irish fund and will be catering for a variety of global investors. I couldn't see an obvious statement that they qualify as a UK reporting fund under HMRC's offshore funds regime, and without that they would be one to avoid if investing unwrapped (because your capital gains would be subject to income tax) - but if you're doing it inside your pension where capital gains and income is all tax free that's not an issue.

DairyQueen

Apologies for the long silence. A week-long celebration resulted in a week-long catchup. I have finally had the chance to revisit the perplexing issue of what to do about the FA/Cash split on our portfolio.

Thank you all for the valuable contributions.

The SIPP in question is held with A J Bell thus D&C are an option.

Thanks bowlhead for your very useful contribution. I was looking at the sterling hedged distributing class and, yes indeed, the funds would be wrapped.

However, I also just spotted this document:
https://www.dodgeandcoxworldwide.com/pdf/prospectus/DC_WW_Prospectus_UK_Country_Supplement_Sept_2017.pdf

In particular, the section that reads: "Some or all of the rules made under the FSMA for the protection of retail clients will not apply to an investment in the Company and compensation under the Financial Services Compensation Scheme of the United Kingdom will not be available."

That's a bummer.

I was considering this particular fund as its aims and allocations are a good fit with my rebalancing targets. I need to increase the following FA allocations: US, EM, Pacific Asia, corporate bond, actively managed. I am also looking for a shorter average duration than, say, the average included in the BBAGB Index

Our portfolio has reasonable exposure to developed market, government and investment grade bonds via VLS (which also covers my allocation to FA passives), plus GAM is UK-biased.

As gm0 observes, the D&C fund is quite racy given its focus on BBB/BB grade (63%) versus AAA/AA/A (32%). However, I have just spotted that the GBP-hedged share class is actually a risk level '3' and not '4'.

My analysis suggests that the addition of this fund would nicely rebalance the portfolio. We do not intend to sell any of the holding for 5/6 years (thanks to that increased cash holding) but may draw on the income generated from the investment prior to that.

Would I be a total numptie to invest around 7.3% of our portfolio into a fund that was absent FSCS protection? If so, can anyone suggest a protected equivalent (and with similar aims, charges, allocations)?