Is guaranteed retirement income a fixed interest asset?

MarkCarnage

This is a passive. If I was reliant on income from bonds then I would not choose a passive.

I would tend to agree. Being able to take some basic exclusion decisions is important. However, the risk in credit is much more asymmetric than equities, therefore a larger number of holdings in an active fund is desirable, to minimise the impact of holding the odd 'torpedo'.

I agree that there are a number of market related risks which we have both referred to which are absent from holding cash. There is an inevitable regional and sectoral concentration in holding a GBP denominated bond fund, as the market just isn't wide enough. However, that's probably an acceptable trade off with the currency risk of going outside GBP in the case of bonds. The likely return profile of a global short dated IG bond fund hedged to GBP is less attractive than cash.

I tend to prefer holding cash as a bond substitute for short term (sub 3-5 year money), and accept that there may be some limited risk of erosion of real value. Who knows, reality might even prevail in that timescale.....already signs that major bond market investors are becoming uneasy about the UK magic money tree being shaken harder and harder in the run up to the election. If they spent it on things with sensible payback that's fine, but some of the uncosted promises being made are just scary.

DairyQueen

MarkCarnage wrote: »

I would tend to agree. Being able to take some basic exclusion decisions is important. However, the risk in credit is much more asymmetric than equities, therefore a larger number of holdings in an active fund is desirable, to minimise the impact of holding the odd 'torpedo'.

I agree that there are a number of market related risks which we have both referred to which are absent from holding cash. There is an inevitable regional and sectoral concentration in holding a GBP denominated bond fund, as the market just isn't wide enough. However, that's probably an acceptable trade off with the currency risk of going outside GBP in the case of bonds. The likely return profile of a global short dated IG bond fund hedged to GBP is less attractive than cash.

I tend to prefer holding cash as a bond substitute for short term (sub 3-5 year money), and accept that there may be some limited risk of erosion of real value. Who knows, reality might even prevail in that timescale.....already signs that major bond market investors are becoming uneasy about the UK magic money tree being shaken harder and harder in the run up to the election. If they spent it on things with sensible payback that's fine, but some of the uncosted promises being made are just scary.

Agreed except my timeframe is sub 6 years. Too close to retirement to risk front-loaded drawdown to the vagaries of the current bond market.

[Deleted User]

MarkCarnage wrote: »

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!

All of this is true. Except that one has to ask himself: “why do I hold bonds?” and the type of bonds will depend on the answer.

In my case, there is only one reason: to protect in the event of a complete disaster in the stockmarket. I hold equity to get returns, not bonds. I even hold equity to protect me from certain risks, like the risk of unexpected inflation.

What could happen during a complete disaster? Bankruptcies. People borrowing via P2P could go bankrupt, a significant percentage. This is the low probability high consequence scenario when your “1%” actually happens, so investment grade corporate bonds would be under threat.

So, I don’t actually care about returns from that (relatively small) bucket of my portfolio and go for short term government bonds or cash.

Audaxer

Thanks for all your responses to my query about the Vanguard U.K. Short-Term Investment Grade Bond Index Fund.

I just thought that fund seemed less volatile than the Strategic Bond fund and the Global Bond fund that I hold in my income portfolio. I hold these funds for the income (dividends around 4%) but was thinking of this additional fund as part of the cash buffer inside my S&S ISA rather than holding a lot of cash within the ISA wrapper.

As the general view is there is still a fair bit of market risk with that type of short-term bond fund as it includes some corporate bonds, is there any other short-term government bond funds you could suggest with even less volatility that could be used as part of a cash buffer? I do appreciate there will always be some risk to capital with any bond fund, but would be interested in other suggestions of short-dated government bond funds.

DairyQueen

Audaxer wrote: »

As the general view is there is still a fair bit of market risk with that type of short-term bond fund as it includes some corporate bonds,

It includes mostly corporate bonds, The balance is allocated to bonds issued by, for example, Canadian provinces (local government). There are no bonds issued by national governments. Having said that, they are high quality bonds (BBB and above).

Audaxer wrote: »

is there any other short-term government bond funds you could suggest with even less volatility that could be used as part of a cash buffer? I do appreciate there will always be some risk to capital with any bond fund, but would be interested in other suggestions of short-dated government bond funds..

Indeed, and that's why even short-dated gilts/treasuries are not a substitute for cash. If this is an ISA investment are you able to part-transfer your cash buffer to a different provider - one that offers a better rate on cash?

Rates offered by cash ISAs are less than unwrapped cash but much higher than if held in a SIPP.

I can't offer any suggestions as very cautious bond funds are absent from our portfolio (sorry). I'm sure someone in-the-know will be along soon.

My portfolio has a smallish %age in passive bond funds in order to reduce volatility on our medium-term drawdown bucket. The only other bond fund I own, and I have owned it for some years, is GAM Star Credit Opportunities. This doesn't fit your requirement or risk profile. Tbh, this fund no longer fits our portfolio but it has performed so well (in its category) I can't bring myself to sell completely. It now makes-up just a few percent of our portfolio.

Thrugelmir

DairyQueen wrote: »

I can't offer any suggestions as very cautious bond funds are absent from our portfolio (sorry). I'm sure someone in-the-know will be along soon.

One needs to think outside the box and accept the reality that currently the days of easy returns are over (for the time being). No free lunches.

Audaxer

DairyQueen wrote: »

It includes mostly corporate bonds, The balance is allocated to bonds issued by, for example, Canadian provinces (local government). There are no bonds issued by national governments. Having said that, they are high quality bonds (BBB and above).

Just out of interest I have now looked at other bond funds on the Vanguard site, and most have a higher risk rating. For example the U.K. Government Bond Index Fund is all UK Gilts but mostly medium to long-dated bonds, so higher up the risk scale despite being Government Bonds. The fund seems to be a lot more volatile than the Short-Term Investment Grade bond fund. Surprisingly there doesn't seem to be a Vanguard fund of only short-dated UK government bonds.

Thrugelmir

Audaxer wrote: »

Surprisingly there doesn't seem to be a Vanguard fund of only short-dated UK government bonds.

Late to the party perhaps. BOE commenced QE and asset purchase facility programme in 2009. Still seems like yesterday.

MarkCarnage

Just out of interest I have now looked at other bond funds on the Vanguard site, and most have a higher risk rating. For example the U.K. Government Bond Index Fund is all UK Gilts but mostly medium to long-dated bonds, so higher up the risk scale despite being Government Bonds. The fund seems to be a lot more volatile than the Short-Term Investment Grade bond fund. Surprisingly there doesn't seem to be a Vanguard fund of only short-dated UK government bonds

It's higher up the risk scale as there is a lot more duration risk there (unless you are matching known liabilities at the same duration). Long dated index linked gilts have even more duration risk and are particularly exposed to changes in real interest rates.

It's a somewhat subjective and arbitrary definition of risk, and suggests that risk is just being defined as volatility of return. A Gilt or Treasury Bond fund will be more liquid than a corporate bond fund so less liquidity risk, and a lot less credit risk too.

However, I doubt it any private investors can now afford to use index linked gilts as the bedrock of their retirement income as they could have done twenty years ago, even ten years ago.

[Deleted User]

Audaxer wrote: »

Thanks for all your responses to my query about the Vanguard U.K. Short-Term Investment Grade Bond Index Fund.

I just thought that fund seemed less volatile than the Strategic Bond fund and the Global Bond fund that I hold in my income portfolio. I hold these funds for the income (dividends around 4%) but was thinking of this additional fund as part of the cash buffer inside my S&S ISA rather than holding a lot of cash within the ISA wrapper.

As the general view is there is still a fair bit of market risk with that type of short-term bond fund as it includes some corporate bonds, is there any other short-term government bond funds you could suggest with even less volatility that could be used as part of a cash buffer? I do appreciate there will always be some risk to capital with any bond fund, but would be interested in other suggestions of short-dated government bond funds.

GLTS is a short-term UK government bond ETF, costing 15 bp. Also iShares has a 0-5 year Gilt ETF, IGLS.