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Malthusian wrote: »Is it lower variance because it's more expensive?
The hedging attempts to eliminate the foreign currency variance which would have otherwise been counterproductive to the stability of the total return.Hedging is financial mindfulness, it's doing nothing, only more expensive.0 -
mmmm - I need a bit more convincing about the benefits of hedging global bonds......
Currencies will fluctuate around the average of all the others. If you are invested widely across the world the movement of the individual local currencies will broadly cancel out relative to the global average. So the only currency whose movements will affect you most is your own: the £.
Generally speaking currencies will fall quickly on bad news and then recover over a much longer period. You dont often get significant currency-moving surprisingly good news, finding oil in the Nortth Sea was the only one affecting the UK I can think of. If the £ falls your global investments increase in value, something that you may not wish to hedge. So the question is what is the time period over which hedging is effective. If I buy a 20 year US bond and the $ falls over the 20 next years will hedging completely protect me? Or rather, if you accept my initial argument, if the £ has a general rise over the next 20 years thanks to the brilliant success of no deal BREXIT will hedging ensure the £ value of my global investments is fully protected?0 -
So the question is what is the time period over which hedging is effective. If I buy a 20 year US bond and the $ falls over the 20 next years will hedging completely protect me?
Good quesion - it depends how the hedging is done, which is something that I haven't found fund managers' documentation to be very transparent about.
In the ideal case, the fund would buy a 20-year US bond, and for each of the associated cashflows (the coupons and the final capital redemption), enter into a GBP/USD FX forward for the appropriate date and amount. In that case you are indeed indifferent to FX spot movements.
And because of interest rate parity (the relationship of FX forward rates to the interest rate differential between the pair of currencies involved), you have effectively swapped USD interest rates for GBP interest rates.
i.e. let's say the risk-free USD rate is R_U and the risk-free GBP rate is R_G
and the unhedged bond in USD yields R_U + C (where C is the credit spread for that bond)
...then the bond and hedge collectively yield (in GBP terms) R_G + C.
Now, do fund managers literally hedge every individual bond like this? Probably not, but a strategy like putting your cashflows into quarterly buckets by maturity date, and entering an FX forward per quarter, ought to get pretty close at an acceptable transaction cost.
Just using FX spot transactions would be less good though, which is why some more clarity from managers would be good.mmmm - I need a bit more convincing about the benefits of hedging global bonds......
It depends I think on your investment objectives. The broadest view of asset allocation is to think of your portfolio in two parts - part A where you accept risk for better long-term returns, and part B which is low-risk and acts as a stabiliser.
Classically part A is global equities and part B is domestic bonds. But you could argue for unhedged global bonds as an element of part A, if you think exposure to particular countries' bonds has a good risk-return profile (emerging market bonds have historically done well here for example).
For part B, unhedged bonds would be too volatile in GBP terms due to currency fluctuations. For that part of the portfolio, I want a diversified range of low-risk GBP bonds. Now, as we saw, hedged global bonds behave basically as if they were GBP bonds because the hedging offsets the currency risk, and swaps foreign interest rates for GBP rates. So that way I can get a more diversified pool of (effective) GBP bonds than I could by restricting myself just to bonds issued in GBP.
That greater diversification is what explains a hedged global portfolio having a similar return to a domestic bond portfolio, but with lower variance.0 -
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I have invested in 2 funds
Vanguard Life strategy 100% equity acc fund (80% of investment) Passively managed 0.22% management fee
Legal & General All Stocks Index Linked Gilt Index Trust (I) - Accumulation (20% of investment) Passively managed 0.15% management fee
I have chosen these 2 funds to give myself an 80/20 stocks/bonds exposure. I am 24 so am willing to take a higher risk than someone later in life. Additionally I only wish the bonds to be domestically based as mentioned in the video in post 4.
Are the management fees mentioned above suitable given the portfolios?0 -
Ask questions.
Get answers and consider them.
Repeat as required.
Act.0 -
bowlhead99 wrote: »It means you are paying money to buy stability rather than being unhedged and taking the raw return which can have greater fluctuation. One may or may not want to do that.
But retail investors don't need to pay for stability. Keeping money in best-buy cash accounts adds stability and you get paid for it. Whereas hedging involves paying to take investment risk and then paying someone else to take it away again. You may as well just take less investment risk.patch9495 wrote:Vanguard Life strategy 100% equity acc fund (80% of investment) Passively managed 0.22% management fee
Legal & General All Stocks Index Linked Gilt Index Trust (I) - Accumulation (20% of investment) Passively managed 0.15% management fee
Why no corporate bonds?
For all their faults they at least have a yield (in conditions which don't require inflation to be consistently above market expectation).
Full disclosure: I don't have any corporate bonds in either my ISA or pension portfolio either, but I know why I don't and I'm interested in why you don't.0 -
Hi Malthusian,
Without sounding ignorant I am new to investing and am purely going from the advice in Lars video in post number 4.
Perhaps if you could explain the difference between the 2?
Many Thanks0 -
Malthusian wrote: »Why no corporate bonds?
Given the OP is only seeking a small exposure to bonds (originally 30%, now 20%) then with a 2 fund portfolio it doesn't seem unreasonable to keep it simple and stick to lower risk Gilts as they have already picked a higher equity proportion than they initially wanted.
Personally with such a small account valuation I would just use VLS80 as the extra 0.07% saved on 20% of the portfolio is not worth the rebalancing effort. It's only really worth doing a 2 fund portfolio when you get towards six figures. They could save more by transfering to Vanguard Investor.
Alex0 -
it doesn't seem unreasonable to keep it simple and stick to lower risk Gilts
Having all of it in IL gilts and none in conventionals gives quite a spicy risk profile though. IL gilts have been bid up pretty heavily (to yields of around RPI minus 1.5 - 2.0%).
And that fund has some long maturities in it. I can't find a calculated duration for it, but 30% of the portfolio seems to be above 30y maturity. So quite a bit of exposure to rising rates.0
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