Short duration bond funds

Thrugelmir

aroominyork wrote: »

There seems to be a disproportionately large proportion of bonds rated BBB which seems a little suspicious.

Blame the Central Banks for their QE policies.

aroominyork

Thrugelmir wrote: »

Blame the Central Banks for their QE policies.

Did QE disproportionately increase the amount of BBB ratings and if so why?

By the way, here's a helpful (and quite amusing) presentation explaining duration and modified duration.

Prism

aroominyork wrote: »

How strongly/consistently is that recommended? My current drawdown plan (which is not as many years away as I’d like) is about four years’ of bonds to be split between a mid/high octane strategic fund (eg Man GLG/Sanlam) and a cautious one. I had my eye on Jupiter Strategic for the cautious but if RL Short Duration continues to perform as it has since launch that looks a good option.

It seems generally recommended for the bonds part of your allocation when in drawdown. Long durations are a bit risky for what is supposed to be the part of the pension you draw on when equities are not doing so well. Short duration bond funds seem fine but only really work when interest rates are rising. Intermediate is a standard option for uncertain times - which seems like most of the time to me. I could always go strategic bond like you say - undecided

aroominyork

Prism wrote: »

Short duration bond funds seem fine but only really work when interest rates are rising.

The RL fund suggests otherwise, returning over 3.5% annualised over the last five years with very low volatility. RL clearly has a specialism in fixed interest and I am trying to understand this sector better because I assume the fund's record must be down to more than just excellent bond picking. Compared to other (lower returns) short duration funds is seems to have slightly longer duration and lower credit ratings, but I'm not sure that explains all of its strong performance.

Thrugelmir

aroominyork wrote: »

Did QE disproportionately increase the amount of BBB ratings and if so why?

The BOE's through it's Quantitative easing and the Asset Purchase Facility currently owns £435bn of gilts and £9.4bn of corporate bonds.

As bonds mature the equilbrium is maintained.

Prism

aroominyork wrote: »

The RL fund suggests otherwise, returning over 3.5% annualised over the last five years with very low volatility. RL clearly has a specialism in fixed interest and I am trying to understand this sector better because I assume the fund's record must be down to more than just excellent bond picking. Compared to other (lower returns) short duration funds is seems to have slightly longer duration and lower credit ratings, but I'm not sure that explains all of its strong performance.

If you look at the graph for that fund it seems to confirm the idea that it does better when the interest rates are rising. Its did its best work during those times when the US was rising interest rates (and it looked like other parts of the world might follow). It has dropped off in recent months as it looks like interest rates may fall. I haven't really compared it to other short duration corporate bond funds - most of them seem to be gilt funds.

I found this a good read https://monevator.com/bond-asset-classes/

aroominyork

Prism wrote: »

If you look at the graph for that fund it seems to confirm the idea that it does better when the interest rates are rising. Its did its best work during those times when the US was rising interest rates (and it looked like other parts of the world might follow). It has dropped off in recent months as it looks like interest rates may fall./

I don't see that pattern. It rose from launch in late 2013 until the fed starting raising rates a couple of years later (despite six quiet months in 2015) and I don't see the recent drop off, in fact quite the opposite - it has powered ahead in 2019.

Edit: So I'm still waiting to be set straight on "if something looks too good to be true..." about this fund.

Prism

aroominyork wrote: »

I don't see the recent drop off, in fact quite the opposite - it has powered ahead in 2019.

I haven't compared it to other short duration bond funds but it has done badly compared to normal (medium/long) bond funds. For example I compared it to the RL Sterling Credit fund (same manager) which is up over 7% YTD.

aroominyork

Prism wrote: »

I haven't compared it to other short duration bond funds but it has done badly compared to normal (medium/long) bond funds. For example I compared it to the RL Sterling Credit fund (same manager) which is up over 7% YTD.

It hasn't done badly. They are different kettles of fish. One is under 3 years duration and FE10, the other is >7 years duration and FE27.

aroominyork

masonic wrote: »

For corporate bonds, especially those with a lower credit rating, the risk of default is more significant and short-dated bonds have a greater risk of default than long dated bonds. Even if they do not default, their capital value can fall significantly in the event of unfavourable economic circumstances because of the default risk.

masonic wrote: »

Bonds are issued with a final bullet repayment of capital. They are not amortising. Therefore the company must either be able to issue more bonds at an affordable coupon, or have enough capital reserves to repay bondholders at maturity. A company that is struggling may be able to limp along for a while, but an event such as one of their bonds maturing would precipitate an insolvency. As a rule, you don't hold debt-based securities from higher risk borrowers to term.

This perspective on the risk of short-term bonds is very interesting but I haven't found anything else online about it. Does anyone else have any views on it?