Is guaranteed retirement income a fixed interest asset?

bostonerimus

jamesd wrote: »

I may well do the same, potentially buying the ground floor flat below the upstairs one where I live. Somewhat like the US two family home and live in one approach.

Yes, being close to the rental has the advantage that you can keep an eye on the place and the tenant knows that too. I choose my tenants based on an initial interview, a couple of pay stubs and talking to their employer and maybe last landlord if they have one. It’s worked out well and the tenants have always stayed at least a couple of years; I insist on a years lease to start and then usually go month to month.

Audaxer

DairyQueen wrote: »

I believe that my portfolio has a place for bonds as I will drawdown up to the max tax free whether I need to or not. I am considering a 25% bond allocation for me and 10% for OH but I am open to advice/suggestions.

DairyQueen, I have just come across this UK Investment Grade short-term bond fund:
https://www.youinvest.co.uk/market-research/FUND:B95W713
It has very low volatility even for a bond fund, and I came across it when looking out of interest at some 'ready-made' portfolios on the Brewer Dolphin site, and it is actually classed as a 'Cash' asset in their portfolios, separate from the other bond funds in their portfolios. So because of the very low volatility of the fund, they seem to be using it as part of a cash buffer within the portfolios. I hadn't previously thought of using a bond fund actually as part of a cash buffer, but it does seem to me a reasonable option for this fund in view of it's cash like returns and very low volatility.

I just wondered what you and other experienced investors thought about using this type of bond fund as part of a cash buffer?

[Deleted User]

Audaxer wrote: »

DairyQueen, I have just come across this UK Investment Grade short-term bond fund:
https://www.youinvest.co.uk/market-research/FUND:B95W713
It has very low volatility even for a bond fund, and I came across it when looking out of interest at some 'ready-made' portfolios on the Brewer Dolphin site, and it is actually classed as a 'Cash' asset in their portfolios, separate from the other bond funds in their portfolios. So because of the very low volatility of the fund, they seem to be using it as part of a cash buffer within the portfolios. I hadn't previously thought of using a bond fund actually as part of a cash buffer, but it does seem to me a reasonable option for this fund in view of it's cash like returns and very low volatility.

I just wondered what you and other experienced investors thought about using this type of bond fund as part of a cash buffer?

These are long term corporate bonds. The returns are not cash-like. This fund will respond to changes in interest rates. There could be a drop during a crash when corporations could be going bankrupt.

If you want something “cash like”, you need short term government bonds (under 5 year duration).

Audaxer

Deleted_User wrote: »

These are long term corporate bonds. The returns are not cash-like. This fund will respond to changes in interest rates. There could be a drop during a crash when corporations could be going bankrupt.

If you want something “cash like”, you need short term government bonds (under 5 year duration).

They are short-term government bonds mostly under 5 years duration - see Morningstar page of the fund's portfolio below:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000PZUV&tab=3

[Deleted User]

Audaxer wrote: »

They are short-term government bonds mostly under 5 years duration - see Morningstar page of the fund's portfolio below:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000PZUV&tab=3

Good point on duration (sorry, I was wrong) but most of this fund is in corporate bonds. So, not so sensitive to interest rates but will adversely respond to an increased risk of bankruptcy at the exact time you need cash the most.

shinytop

Audaxer wrote: »

They are short-term government bonds mostly under 5 years duration - see Morningstar page of the fund's portfolio below:
https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000PZUV&tab=3

A couple of (genuine) questions. Apart from its availability in a pension wrapper, why is this better than cash? Its 5Y return is 1.9%, which is available in savings accounts but without the risk. And secondly, how do the banks offering a 2% fixed rate make any money? They must be lending it out at higher rates or have I missed something?

DairyQueen

Triumph13 wrote: »

@Dairyqueen I agree with you on bonds at the moment and avoid them as an asset class using cash (outside the pension) instead. With no scope for capital gain on long dated gilts (and lots of scope for capital loss) they do not look attractive to me. Cash for now and DB / SP for later gives me the floor to accept equity volatility on everything else.

I meant to reply that this is also our situation. Drawdown will be front loaded. (2021 thru 2025) - all now in pension-wrapped cash. This optimises tax before DB/SP is all online. After that, we have a projected income shortfall of under 5% to be met from drawdown. Unwrapped cash will cover if we need to suspend or we can cut expenses, otherwise tax thresholds will determine how much we drawdown.

Linton

shinytop wrote: »

A couple of (genuine) questions. Apart from its availability in a pension wrapper, why is this better than cash? Its 5Y return is 1.9%, which is available in savings accounts but without the risk.

- You can sell the fund at any time with no hassle

- It can be held in a tax protected environment

- There is no maximum holding

And secondly, how do the banks offering a 2% fixed rate make any money? They must be lending it out at higher rates or have I missed something?

Banks do lend out at a higher rate than they pay in interest. That is the fundamental purpose of a bank.

MarkCarnage

Deleted_User wrote: »

Good point on duration (sorry, I was wrong) but most of this fund is in corporate bonds. So, not so sensitive to interest rates but will adversely respond to an increased risk of bankruptcy at the exact time you need cash the most.

They are pretty much all investment grade credit. They will certainly be vulnerable to a degree to spread widening and any upward shift in the yield curve if interest rates rise, but the short duration should lessen that.

Risk of bankruptcy or default has historically been a pretty minor risk for investment grade credit, going back a long time. Typically 1% or less. Even then, there is usually some sort of partial recovery of capital. There is a sharp break point between investment grade credit and non investment grade (junk) here, where the default rates are typically several times higher. In the last year the default rates have been 0.1% and 4.7% respectively. Not to say that they wouldn't go a fair bit higher in a credit crisis, but some perspective might be useful.

I would be more concerned in the first instance about liquidity risk in a stressed situation. Credit has become a less liquid asset in recent years due to changing regulatory rules as much as anything. In a crisis, that would exacerbate. This fund would probably be relatively less affected than those with longer duration or lower credit rating but it's still something to keep an eye on.

However, as I've said, the real !!!! tends to be in the non investment grade stuff, or increasingly in P2P in the UK!

DairyQueen

Audaxer wrote: »

DairyQueen, I have just come across this UK Investment Grade short-term bond fund:
https://www.youinvest.co.uk/market-research/FUND:B95W713
It has very low volatility even for a bond fund, and I came across it when looking out of interest at some 'ready-made' portfolios on the Brewer Dolphin site, and it is actually classed as a 'Cash' asset in their portfolios, separate from the other bond funds in their portfolios. So because of the very low volatility of the fund, they seem to be using it as part of a cash buffer within the portfolios. I hadn't previously thought of using a bond fund actually as part of a cash buffer, but it does seem to me a reasonable option for this fund in view of it's cash like returns and very low volatility.

I just wondered what you and other experienced investors thought about using this type of bond fund as part of a cash buffer?

I should caveat that I am not an experienced investor but an enthusiastic researcher and student . I constantly learn something new from the experienced folks here.

I went to the horse's mouth (Vanguard's site) to take a look at their U.K. Short-Term Investment Grade Bond Index Fund.

My thoughts:
1) This is a passive. If I was reliant on income from bonds then I would not choose a passive. For me, bonds are an asset class better actively managed as it is so sensitive to interest rates and to specific/regional government policy. Foreward thinking is required. Passives are fine for volatility management and the Acc share class would be my choice in that situation.

2) It's sample-tracking the Bloomberg Barclays GBP Non-Government 1-5 Year 200MM Float Adjusted Bond Index. The clue to underlying assets is in the title. It has over 29% allocated to corporate financial institutions (banks), 20% to 'government related agency' and almost 20% to corporate industrials. 32% AAA, 17% AA, 19% A and 31% BBB. That explains the risk level 2. None of this is junk but nor is it free of market-risk. Check-out the full list of holdings on the 'portfolio data' page: https://www.vanguardinvestor.co.uk/investments/vanguard-uk-short-term-investment-grade-bond-index-fund-income-shares/portfolio-data

3) The current yield is 1.41% on income shares, and 1.39% (reinvested) on Acc, as at 30 Sep. The historical performance is academic (other than its ability to track its index) as with FI it's the future yield that counts for new money. If the markets crash the fund will track down be it far less than equities.

4) The index tracks short-term quality bonds across developed markets. Large companies and bonds issued by local government dominate. Gilts/treasuries are absent. The fund samples the index and has 30% in the UK, 21% in Germany 12% supranational, 7.2% USA, 5.6% France, plus a few % each to other developed economies (mostly Europe). That's a lot of exposure to Europe and to the UK and Germany in particular.

It is still just about possible to exploit inflation-matching strategies on unwrapped cash, and with no market risk. Whist inflation remains low the erosion of real value on wrapped cash may be a better solution for some than bonds (market and inflation risk).

The fund has the typical profile of an investment-grade bond fund in the current climate. Low returns, exposure to the viability and price of bond-sponsoring companies. It is regionally/nationally and sector concentrated. There is definitely market risk here for all kinds of reasons and no substitute for cash.

Just my two penn 'orth.