Short duration bond funds

masonic

If you want a description online, you could start here:
https://en.wikipedia.org/wiki/Refinancing_risk
https://www.investopedia.com/terms/r/rollover-risk.asp

aroominyork

masonic wrote: »

If you want a description online, you could start here:
https://en.wikipedia.org/wiki/Refinancing_risk
https://www.investopedia.com/terms/r/rollover-risk.asp

That's helpful, masonic, and I appreciate it, but I'm still keen to get perspectives from others on this issue of bond maturity specifically in the context of short-term bond funds.

Filo25

RL certainly has an interesting mix of bond funds with some very strong performers in there.

Unfortunately its not an area I know as much about as a I should.

Over the time period in question does anyone know what has been happening to the risk spread for non investment grade v investment grade? Maybe some of this performance could be driven by increasing appetite for risk in the bond markets and rising prices for non investment grade debt

aroominyork

I am reopening this thread on short duration bonds.

A friend has asked for some advice on an inheritance, a property which she will rent out and about £30k cash. She plans to save £15k as an emergency fund and put the balance towards a pension. She is 5-10 years from retirement and has minimal workplace and no SIPP pension investments. We have talked through the options and she does not want to invest in equities so the options seem to be cash or fixed interest.

Given her low risk tolerance I have two bond funds in mind: Jupiter Strategic Bond and Royal London Short Duration Credit. That brings me back to where the risk lies in the RL fund given its steady, low volatility rise of c.3.6% since launch in 2014. Jupiter has risen a similar amount in the same period with slightly more volatility.

Masonic’s posts #6 and #22 are helpful in explaining the risk of maturing bonds defaulting i) in an economic downturn or ii) when interest rates rise and borrowers cannot afford the re-financing rates on offer. If that is correct, how might a short duration fund perform in those circumstances compared to a medium risk strategic bond fund such as Jupiter?

Looking at credit quality, Jupiter is 55% investment grade and RL is 69% investment grade. Is that materially relevant, for example indicating that RL purposefully selects companies that, as masonic said in post #6, will have relatively little time to limp along before the bond matures?

Malthusian

aroominyork wrote: »

We have talked through the options and she does not want to invest in equities so the options seem to be cash or fixed interest.

Why does she not want to invest in equities?

If she wants to invest in fixed interest then "they're risky" isn't an answer. A conservative multi-asset portfolio with a mix of equities and bonds is less risky than bonds alone. The latter has high shortfall risk, and a risk of capital loss when interest rate rises are priced in, and gives nothing in return for taking that risk.

Would she be better off seeing an IFA than you risking both her money and your friendship? Failing that, would it not be better for her to ask here rather than using you as a go-between?

Thrugelmir

aroominyork wrote: »

Given her low risk tolerance

I assume that she fully understands the risks involved in letting property.

aroominyork

Malthusian wrote: »

If she wants to invest in fixed interest then "they're risky" isn't an answer. A conservative multi-asset portfolio with a mix of equities and bonds is less risky than bonds alone. The latter has high shortfall risk, and a risk of capital loss when interest rate rises are priced in, and gives nothing in return for taking that risk.

Thanks. I now remember seeing risk/return curves showing that mixed assets are less risky than fixed interest alone. I'll dig it out.

AnotherJoe

LOL "low risk" yet will become a LL .

Audaxer

AnotherJoe wrote: »

LOL "low risk" yet will become a LL .

I think a lot of people that do not read these forums or know about investments, would think that inheriting a property and renting it out, is less risky than selling it and investing the proceeds in an investment portfolio of equity and bonds. I'm not saying property is less risky, but I'm not surprised that the OP's friend thinks it is less risky. It may be that she knows the property market and is more comfortable being a landlord than managing an investment portfolio.

MaxiRobriguez

A spike in inflation matched by central bank interest rate increases brings down the entire bond market. The chance of loss at this point is higher than most people perceive. Complacency due to 30 years of positive returns means investors ignore the current global situation.

It's difficult for income investors now as other assets aren't in a much better place in terms of risk, but to manage that surely the most efficient course of action here is to diversify more, not less. Large cap equity income, bonds, precious metals, cash - perhaps equally split.