Which Bond Fund

David_66

Helping my partner sorting her investments with a 80% equity to 20% bond split, we are looking to the bonds to give some protection in 2008 type crashes.

People seem to recommend Vanguard Global Bond Index Fund GBP Hedged Accumulation. I've also seen Vanguard U.K. Investment Grade Bond Index Fund GBP Accumulation mentioned which seems to perform a lot better than the global bond. I'm presuming that this is due to the far higher ratio of corporate bonds.

Would I be correct in thinking that though the global bond has given an average of a 3.72% return over the last 10 years as opposed to the U.K investment Bond with a 5.93% return, that the uk bond would be more likely to drop more during the next crash?

Thanks

SonOf

Helping my partner sorting her investments with a 80% equity to 20% bond split, we are looking to the bonds to give some protection in 2008 type crashes.

a 20% allocation to fixed interest securities is hardly going to make any difference.

People seem to recommend Vanguard Global Bond Index Fund GBP Hedged Accumulation.

I assume you use the term "recommend" in a non-regulatory sense. Man down pub style.

Most sector allocated models have little or nothing allocated to global bonds. Partly as they do not reduce the volatility much as they are subject to currency fluctuations.

I've also seen Vanguard U.K. Investment Grade Bond Index Fund GBP Accumulation mentioned which seems to perform a lot better than the global bond.

Forget past performance comparisons. You are not comparing like for like.

I'm presuming that this is due to the far higher ratio of corporate bonds.

No its not.

Would I be correct in thinking that though the global bond has given an average of a 6.47% return over the last 10 years as opposed to the U.K investment Bond with a 3.72% return, that the global bond would be more likely to drop more during the next crash?

generically, global bond funds are higher risk than UK bond funds (excluding high yield bonds).

Index linked gilts are out of favour at the moment but UK gilts are still in favour as the least worst option compared to UK bonds.

A high risk portfolio of 80% equities would usually not be looking for much downside protection. So, its more likely UK bonds would be used with a smaller amount of UK gilts given where we are in the current cycle.

Prism

I use two ETFs, XGSG and XGIG. Government bonds only, global and hedged. After the hedging costs probably performs as well as UK Gilts but the diversification makes me feel better.

EdGasketTheSecond

Short-dated corporate bonds. Try iShares IS15. I wouldn't get anything other than short-dated as you run the risk of losing a lot on bonds from here when interest rates eventually return to normal levels.

A_T

David_66 wrote: »

Helping my partner sorting her investments with a 80% equity to 20% bond split, we are looking to the bonds to give some protection in 2008 type crashes.

if it's protection in that kind of scenario I would use government bonds from UK, US or Eurozone countries. and the longer duration the more likely they will attract money from investors fleeing to safety. funds such as:

iShares $ Treasury Bond 20+yr UCITS ETF
Vanguard UK Long Duration Government Bonds
iShares Euro Government Bond 15-30yr UCITS ETF
SPDR Barclays 15+ Year Gilt UCITS ETF
UBS ETF (LU) Bloomberg Barclays TIPS 10+ UCITS ETF

aroominyork

So you can see from the last three posts that there is no one answer - you’ve been suggested global govt bonds, then short-dated corporate bonds, then long-dated govt bonds. If, like me, you find bonds more complex than equities then the way to go might be to select a strategic bond fund that matches your risk appetite.

Shocking_Blue

Just browsing this thread and looked up the first two of the recommendations from A_T out of interest. Like Wow YTD returns - presumably after such sharp rises one should be wary of a downturn before thinking of investing in these..?

David_66

aroominyork wrote: »

So you can see from the last three posts that there is no one answer - you’ve been suggested global govt bonds, then short-dated corporate bonds, then long-dated govt bonds. If, like me, you find bonds more complex than equities then the way to go might be to select a strategic bond fund that matches your risk appetite.

Thanks for all the replies.
What I was thinking of was something that would be similar to the non equity portion of HSBC Global Strategy Balanced or Vanguard Lifestrategy 60

Are there strategic bond funds which would be similar to that or do you just need to buy the relevant proportions of Global Bond Index Fund, U.K. Government Bond Index Fund, Inflation-Linked Gilt Index Fund etc and re-balance them every now and then? One fund for that spread of bonds would be a lot simpler.

bowlhead99

Shocking_Blue wrote: »

Just browsing this thread and looked up the first two of the recommendations from A_T out of interest. Like Wow YTD returns - presumably after such sharp rises one should be wary of a downturn before thinking of investing in these..?

Taking the first one as an example, the US Fed cut interest rates twice this year, and half the fed members think there could be another cut by year end. When long-term govt bonds pay out a fixed amount of interest per year, and those payments will continue for multiple decades, the bonds become much more desirable when market interest rates drop, because new bonds would be issued at lower rates and everyone will compete to pay more money for the existing bonds which provide nice high rates.

So if interest rates fall and equity markets wobble (trump trade war, oil refineries blowing up etc), safe haven income sources like long dated dollar bonds are relatively more attractive which pushes the bond prices up (and their yields down).

Here in the UK (the second fund in the list of examples), the 30-yr bond yield fell to below 1% about 6 weeks ago for literally the first time on record. The low yields from the bonds (and high prices of the bonds, because price moves in the opposite direction to yield) act as a signal that financial markets expect slower growth and cuts in Bank of England interest rates. The trade conflicts and retaliatory tariffs between US and China are an example of something that causes fear - beyond the economies of just US and China themselves - that the world economy is headed for a downturn.

As a UK-specific issue, markets are also betting that the Bank of England will be forced to cut interest rates before the end of the year if Britain leaves the European Union in a month's time without a transition deal to reduce economic disruption. Just as with the US rate cuts, this makes existing long-term bonds more valuable.

What this shows is that investors do still have an appetite for 'safe' assets - and that even when bond prices are already pretty high and yields low, bonds can still help preserve capital and give positive returns... because yields can still go lower. Various parts of the world including Europe have negative interest rates at the moment, and just because UK and US don't, doesn't mean they couldn't. Trump would be a big fan of the latter and has complained about the Fed being all independent (rather than helping his political career and real estate business, although he does not use quite those words).

The checks and balances in the US government would probably not favour a zero percent rate in the US because of the incredibly bad signals it would send out, but lower than 1.75% as a base rate is perfectly possible given how low the federal funds rate was post-financial-crisis. So, you could see gains in long term bonds prices. If what you want more than anything is to be insulated from share price crashes, government bonds are an option.

But, is that really what you want more than anything? As you mention, there could easily be a downturn of bond pricing because long term bond prices are heavily geared to market interest rates and the prospects of the relevant economy. Imagine if Brexit were cancelled or postponed for a long while, or a deal much better than 'worst case scenario' was agreed... the bond price movements which came on the back of fears for growth prospects and likelihood of interest rate drops, could go back a long way in the opposite direction from where they came in recent months.

David_66 wrote: »

Thanks for all the replies.
What I was thinking of was something that would be similar to the non equity portion of HSBC Global Strategy Balanced or Vanguard Lifestrategy 60

Are there strategic bond funds which would be similar to that or do you just need to buy the relevant proportions of Global Bond Index Fund, U.K. Government Bond Index Fund, Inflation-Linked Gilt Index Fund etc and re-balance them every now and then? One fund for that spread of bonds would be a lot simpler.

There are not really any 'strategic' funds which try to follow the specific proportions of the bond component of Lifestrategy, as it is fair to say that most managers who are being paid a management fee to take a 'strategic' go-anywhere view of the best risk/reward opportunities in the bond market, are unlikely to think that the best thing to do is just buy an index of all the different bonds that exist in proportion to how much of them exists. So you don't tend to see the most popular strategic bond funds using bond indexes. You will see different managers have their own personal or 'house view' on where and how to invest and why, described in their factsheets and reports.

Within active funds, I quite like Jupiter Strategic Bond and M&G Optimal Income - have held the latter for a long time and it has not done so well in the league tables in the last 5 years ; this stems from having a much shorter modified duration than some contemporaries, which has cost it performance against the rest of the sector - including those that took heavy exposure to the long dated gilt / US treasuries discussed above. Its approach still seems reasonable, given the various risks it is trying to navigate, though perhaps it is best to hold more than one strategic fund rather than put eggs into one basket and find that it is a 'dud' due to the exact nature of the next crash.

Neither of those managers would use bond indexes as a core part of what they do though. They are just examples for which you could pull up a factsheet and get a sense of what they are doing at a point in time.

What you could consider if you want to use an index approach to the 'not equities' part of your portfolio is diving into the same multi-asset fund ranges you mention at a lower risk level. For example VLS 20 is mostly a load of bond indexes with only 20% equity exposure. HSBC Global Strategy Cautious has a lot more bonds than its 'Balanced' version. L&G Multi-Index 3 is well over 60% bonds and cash.

However, if you were looking to use a mixed asset fund with a high bond or non-equities allocation as a substitute for a strategic bond fund, it would not really make a lot of sense to use that in conjunction with another mixed asset fund that had a high equities allocation. You would be better to just find some middle-ground fund which had both debt and equity.

finellah

SonOf wrote: »

Most sector allocated models have little or nothing allocated to global bonds. Partly as they do not reduce the volatility much as they are subject to currency fluctuations.

I've not read it all but at the link below is a Vanguard document on global bond considerations that may be of interest. Discusses hedging, volatility etc

https://www.vanguard.co.uk/documents/adv/literature/going-global-with-bonds-tlor.pdf

on_the_cusp

The bond holdings within the Lifestrategy funds are about 2/3 in government bonds, 1/3 in corporate bonds. That is about the same as Vanguard Global Bond Index Fund. And both of them hedge all non-sterling bonds back to sterling.

One difference is that about 10% of the bonds in Lifestrategy are in index-linked gilts, and Vanguard Global Bond Index Fund (let's call it VGBIF) includes no index-linked bonds. You could combine 90% in VGBIF with 10% in an index-linked gilts fund, to get something similar to Lifestrategy's bonds. However, if you have 80% in equities, you don't have much need for inflation-protection from your bond holdings, becaues equities give you a kind of inflation protection. So I think just using VGBIF would be a reasonable approach.

There are plenty of other approaches, of course.

One question is how useful it is to hold government bonds from outside the UK, rather than just gilts (especially since, I'm assuming, you do want any non-sterling bonds hedged back to sterling). If you'd rather omit the overseas government bonds, then you could put 2/3 in a gilts fund, and 1/3 in a global corporate bonds fund, such as Vanguard Global Corporate Bond Index Fund (call it VGCBIF).

I think there's a stronger case for including overseas corporate bonds than overseas government bonds. However, if you don't want to include the overseas corporates, you could replace VGCBIF with Vanguard U.K. Investment Grade Bond Index Fund.

Another alternative to VGCBIF that I might consider is Vanguard Global Credit Bond Fund, which is an active fund (an active fund from Vanguard? shock! horror! ), which covers similar territory to VGCBIF, at only marginally higher cost (0.35% OCF, instead of 0.25%).

Another approach is, instead of just holding a middle-of-the-road gilts fund, to split your gilts allocation equally between long-term and short-term gilts; and then not actually buy the short-term gilts after all, but replace them with a ladder of short-term fixed-rate savings accounts (anything from 1-year to 5-year accounts), because the latter are comparable to short-term gilts but pay significantly more (2% or more, compared 0.5% or less for short-term gilts). Then you might have your bond allocation split between 1/3 in those fixed-term savings accounts, 1/3 in a long-term (15+ years) gilts fund, and 1/3 in VGCBIF.

Another point is (as SonOf suggests) that somebody with a lot of equities may not be so bothered about downside protection. The latter is provided by long-term gilts (which are likely — though not certain — to actually rise when equities are crashing) and by the short-term gilts or fixed-term savings accounts (which stay steady in value whatever is happening). Corporate bonds don't provide downside protection, but are an attempt to push for higher returns than gilts. So you might want more than 1/3 in VGCBIF, and less than 2/3 in gilts (you could still divide the gilts equally between fixed-term savings accounts and a long-term gilts fund).

So there are plenty of ways to set up your bonds. I don't really see the attraction of strategic bond funds. They can do the same things you can do with passive building blocks, but at a higher cost, and they don't have access to such good fixed-term savings accounts as you do as a private individual (with relatively small amounts of cash to place). My fear is that they'll start taking on unnecessary risks, because if they don't, their returns will just be like a passive bond fund only with higher charges, which won't look very good.