equities / bonds - investment strategy

Albermarle

Some sold, some continuing to be held, have dialled back my bond allocation a bit this year

Exactly what I have done .I hope we are right !

Linton

Deleted_User wrote: »

That’s not a fact. That’s an opinion. We’ve seen this opinion expressed routinely for several years. So far it has been wrong. Maybe there is a bubble in bonds. We would only know after it bursts. We don’t know the future.

It is a fact that UK Gilts are approaching the price at which they are certain to lose money in £ terms if held to maturity. What do you think will happen then?



To take an example I used earlier:
The UK 4% 2060 Treasury Gilt was issued in 2012 at a price of £100 and will be redeemed for £100 in January 2060. It is now trading at £195. So happy gilt investors have seen a 95% capital rise over the past 8 years. Do you believe that it could possibly continue to rise at that rate for the next 8 years.


Let's consult https://www.fixedincomeinvestor.co.uk/x/yieldcalc.html. It tells me that at a price of £260, 33% above the current one, the net reurn would be zero. In 5 years time this zero return price will have dropped to £240, in 10 years £220.


Perhaps you are confusing the US bond situation with that in the UK. The US 10 year government bond yield is currently around 1.8% per year, the UK one 0.62%, so very different.




PS for a 10 year gilt, current price £143, price for zero return £150, very much less room for an increase.

cfw1994

Just a comment on bonds/gilts. & please take this from someone who doesn't *really* profess to fully understanding them.....

For various reasons, I've been taking a close interest in my Aviva DC pension the past few months (couple of years, I guess). I have the monies spread across a few funds.

Just looking since 5th Jan, they have all done pretty well (under a fortnight, I know, absolute proof that things will collapse tomorrow....): but the bond and gilt trackers appear to be doing better than the others!
In % terms:

+2.7% Aviva North American
+4.7% BlackRock over 15 Year Corp Bond Index Tracker
+2.7% BlackRock Wld (ExUK) Eq Idx (Aq HP)
+1.9% Aviva Av Fixed Interest
+3.4% BlackRock over 15 Year Gilt Index Tracker

I specifically chose those trackers to lower volatility and risk, yet (for now at least!) they are performing stupidly well.

Yes, I know 2 weeks is but a blip in the time horizon I and others are looking at, and perhaps all this does is suggest I should stop looking at the numbers and get out more....but even so.....

Linton

cfw1994 wrote: »

Just a comment on bonds/gilts. & please take this from someone who doesn't *really* profess to fully understanding them.....

For various reasons, I've been taking a close interest in my Aviva DC pension the past few months (couple of years, I guess). I have the monies spread across a few funds.

Just looking since 5th Jan, they have all done pretty well (under a fortnight, I know, absolute proof that things will collapse tomorrow....): but the bond and gilt trackers appear to be doing better than the others!
In % terms:

+2.7% Aviva North American
+4.7% BlackRock over 15 Year Corp Bond Index Tracker
+2.7% BlackRock Wld (ExUK) Eq Idx (Aq HP)
+1.9% Aviva Av Fixed Interest
+3.4% BlackRock over 15 Year Gilt Index Tracker

I specifically chose those trackers to lower volatility and risk, yet (for now at least!) they are performing stupidly well.

Yes, I know 2 weeks is but a blip in the time horizon I and others are looking at, and perhaps all this does is suggest I should stop looking at the numbers and get out more....but even so.....

UK gilts represent rather less than 50% of your bond innvestments with corporate bonds rather more. Corporate bonds are different to gilts in that there is risk. This prevents corporate bond prices rising to crazy levels.


In any case one doesnt buy bonds for capital gain - if that is what one wants equities are a much better option. Their purpose for an investor is to provide a steady return from a steady capital value. Large deviation from this ideal removes the main reason for buying them.

cfw1994

Linton wrote: »

UK gilts represent rather less than 50% of your bond investments with corporate bonds rather more. Corporate bonds are different to gilts in that there is risk. This prevents corporate bond prices rising to crazy levels.


In any case one doesn't buy bonds for capital gain - if that is what one wants equities are a much better option. Their purpose for an investor is to provide a steady return from a steady capital value. Large deviation from this ideal removes the main reason for buying them.

I appreciate they are not UK-based options (actually partly why I liked them!)
Both are 'moderate' risk (level 5 on the Aviva 5-7 scale, but I appreciate those levels are relative to similar things, not necessarily other funds), and I didn't pick them for capital gain, but to help 'smooth' the ride through any choppy market waters.

My point was simply that they curiously both appear to be outstripping the market right now!
(mind you, checking their latest Dec factsheet shows they both did 18-19% growth in 2019 - maybe I should chose more cash to smooth that ride!!!)

[Deleted User]

Linton wrote: »

It is a fact that UK Gilts are approaching the price at which they are certain to lose money in £ terms if held to maturity. What do you think will happen then?

To take an example I used earlier:
The UK 4% 2060 Treasury Gilt was issued in 2012 at a price of £100 and will be redeemed for £100 in January 2060. It is now trading at £195. So happy gilt investors have seen a 95% capital rise over the past 8 years. Do you believe that it could possibly continue to rise at that rate for the next 8 years.

Let's consult https://www.fixedincomeinvestor.co.uk/x/yieldcalc.html. It tells me that at a price of £260, 33% above the current one, the net reurn would be zero. In 5 years time this zero return price will have dropped to £240, in 10 years £220.

Perhaps you are confusing the US bond situation with that in the UK. The US 10 year government bond yield is currently around 1.8% per year, the UK one 0.62%, so very different.

PS for a 10 year gilt, current price £143, price for zero return £150, very much less room for an increase.

I know all that and it does concern me. British government bond yield isn’t even the lowest in Europe.

Overriding all of the above is my understanding that with the exception of yield to maturity (which is a fact), all other points and arguments are guesses about what might happen in the future.

Several factors which are completely unknown but will impact return on bonds:

1. Future interest rates. We know zilch about that.
2. Future inflation or deflation. Deflation is good for bonds. Bad for stocks. Unexpected inflation can be devastating. If everything is as predicted then no impact, but it’s never as predicted.
3. Future equity performance. A crash and people rush into safety of government bonds. Dividends on blue chips go up and people move away from bonds.
4. Future central bank actions. If they start massive buying sprees, price of bonds will go up. And the other way around.

To top it all, if you hold bonds through funds then you never ever hold bonds to maturity and are gaining vs that particular scenario.

So... Yes I am concerned that this could be a bubble in both stocks and bonds. Any reasonable investor should be. Yes, I am concerned about low yields. No, I am not changing my asset allocation.

And if you are not investing into gilts because of low YTM then surely you should stop putting anything into S&P 500 because the multiples are very high by historic standards. And you should avoid corporate bonds because companies are carrying a lot of debt and bonds will fail if interest goes up.

Is that what you are doing? Sitting in cash and gold?

Linton

Deleted_User wrote: »

I know all that and it does concern me. British government bond yield isn’t even the lowest in Europe.

Overriding all of the above is my understanding that with the exception of yield to maturity (which is a fact), all other points and arguments are guesses about what might happen in the future.

I have made no predictions about what may happen in the future, merely pointing out that a potentially unlimited bull market in Gilts is not feasible unless bond buyers are prepared to accept guaranteed losses.

Several factors which are completely unknown but will impact return on bonds:

1. Future interest rates. We know zilch about that.

Indeed. Though we do know a bit - interest rates cant drop much below zero. Future interest rates represent the side of the safe bond risk equation. So take my example of a 40 year bond with a current YTM of 1.08. 6 years ago the market requireded a YTM of about 3.5%. To what would the current price of £195 drop if these conditions returned by 5 years time, which is certainly feasible? Answer: £110, a fall of 44%. Is this an acceptable risk for an investment which is meant to reduce the risk of equities?

2. Future inflation or deflation. Deflation is good for bonds. Bad for stocks. Unexpected inflation can be devastating. If everything is as predicted then no impact, but it’s never as predicted.
3. Future equity performance. A crash and people rush into safety of government bonds. Dividends on blue chips go up and people move away from bonds.
4. Future central bank actions. If they start massive buying sprees, price of bonds will go up. And the other way around.

All these things could happen, but if they did do you believe that gilts would increase in price significantly above the zero return level?

To top it all, if you hold bonds through funds then you never ever hold bonds to maturity and are gaining vs that particular scenario.

But someone has to hold the bonds at maturity, and they presumable would have bought from someone else who perhaps held the bonds until a year before maturity etc etc. Do you believe the cost of crystallising the loss in capital value would be delayed until the last possible moment?

So... Yes I am concerned that this could be a bubble in both stocks and bonds. Any reasonable investor should be. Yes, I am concerned about low yields. No, I am not changing my asset allocation.

And if you are not investing into gilts because of low YTM then surely you should stop putting anything into S&P 500 because the multiples are very high by historic standards. And you should avoid corporate bonds because companies are carrying a lot of debt and bonds will fail if interest goes up.

Is that what you are doing? Sitting in cash and gold?

Equities are very different to bonds. With safe bonds that are already in circulation the value in £s of overall loss or profit is fixed as the cost has been paid and interest that will be received in £ terms is known. Whatever happens to interest rates, inflation etc will not change this. With equities the future is completely unknown. It is perfectly possible that the current arguably overvalued equity prices, particularly in the tech sector, will be justifed by future growth. This is presumably what the market, or a sufficiently large part of it believes. Outside the Tech sector I believe valuations are much more firmly based. So I control risk by limiting exposure to tech.

Simlarly with corporate bonds. There is a risk that individual bonds will fail, but this risk can be controlled to some extent by diversification and avoidance of the seriously risky end of the market. Mass failure of corporate bonds is theoretically feasible but if economic conditions are such that this happens we are all probably doomed anyway.

Linton

Perhaps I can make my point more starkly...


When a bond is issued the total profit over its life is cast in stone. What varying bond prices do is to enable future interest income to be converted to capital gains or vice versa. But it's a zero-sum game, at the end of the day all additional gains by some people are balanced by additional losses by other people.

[Deleted User]

There are a lot of active decisions in your strategy. And you do make assumptions about the future. For example, up until recently everyone told me that negative coupon on bonds was not possible. And yet we have it.

By the way, I don’t care about return in currency terms. What I care about is preservation of purchasing ability.

I see where you are coming from, but your guesses could be wrong. Which is why I diversify within and between asset classes.

[Deleted User]

When a bond is issued the total profit over its life is cast in stone.

Not in real terms (which is what matters), nor do we care about one bond if we own a bond fund with bonds of different types purchased at different times and duration.