Assistance with improving my pension fund choices

danlightbulb

AnotherJoe said:

Or just pick a big gobal fund (the sharia one) and have it done by default. Or does the sharia come bundled with some other garbage? I forget now....

No they re saying (pardon me csg if im wrong) that a lot of your money will be invested for at least 15 years so why would you tie such a large amount of it in bonds for that time when it shoudl be in equities.

The sharia fund I was looking at is very technology heavy - like 40%+, and its only 2% UK equities. I decided that was too far to move. I have selected the Blackrock global equity ex-UK index to run in conjunction with the Blackrock 50/50 global equity index to get the right mix of regions and a more even split of sectors.

On your second point - the answer was because I was aiming for 70/30 between equities and bonds? Are you saying that mix is too conservative?

Albermarle

danlightbulb said:

AnotherJoe said:

Or just pick a big gobal fund (the sharia one) and have it done by default. Or does the sharia come bundled with some other garbage? I forget now....

No they re saying (pardon me csg if im wrong) that a lot of your money will be invested for at least 15 years so why would you tie such a large amount of it in bonds for that time when it shoudl be in equities.

The sharia fund I was looking at is very technology heavy - like 40%+, and its only 2% UK equities. I decided that was too far to move. I have selected the Blackrock global equity ex-UK index to run in conjunction with the Blackrock 50/50 global equity index to get the right mix of regions and a more even split of sectors.

On your second point - the answer was because I was aiming for 70/30 between equities and bonds? Are you saying that mix is too conservative?

Yes he is but Another Joe is an advocate of 100% equity in most circumstances . Others would say 70/30 was OK.
You have to do what you think suits you . 

Sailtheworld

danlightbulb said:

AnotherJoe said:

Or just pick a big gobal fund (the sharia one) and have it done by default. Or does the sharia come bundled with some other garbage? I forget now....

No they re saying (pardon me csg if im wrong) that a lot of your money will be invested for at least 15 years so why would you tie such a large amount of it in bonds for that time when it shoudl be in equities.

On your second point - the answer was because I was aiming for 70/30 between equities and bonds? Are you saying that mix is too conservative?

Appetite for risk should be influenced by the length of the investment period. A 'cautious' 20 year old with a 50 year investment journey ahead would just be throwing money away by owning any gilts / bonds. They have the timescale to ride out a number of crashes, recessions & other events so don't need to accept a performance drag for downside protection they don't need. A nervous 20 year old would be best served by a 100% equity portfolio and a disinterest in the markets.

Prism

Sailtheworld said:

danlightbulb said:

AnotherJoe said:

Or just pick a big gobal fund (the sharia one) and have it done by default. Or does the sharia come bundled with some other garbage? I forget now....

No they re saying (pardon me csg if im wrong) that a lot of your money will be invested for at least 15 years so why would you tie such a large amount of it in bonds for that time when it shoudl be in equities.

On your second point - the answer was because I was aiming for 70/30 between equities and bonds? Are you saying that mix is too conservative?

Appetite for risk should be influenced by the length of the investment period. A 'cautious' 20 year old with a 50 year investment journey ahead would just be throwing money away by owning any gilts / bonds. They have the timescale to ride out a number of crashes, recessions & other events so don't need to accept a performance drag for downside protection they don't need. A nervous 20 year old would be best served by a 100% equity portfolio and a disinterest in the markets.

I agree but it should also be based on the likelihood that the investor isn't disinterested in the markets and begins to dabble when things are looking tough. Its the hard bit to judge before you see it unfold before your eyes and based on the number of panicked posts around March this year disinterested investors of any age can become very interested all of a sudden when things take a turn for the worse.

Albermarle

Prism said:

Sailtheworld said:

danlightbulb said:

AnotherJoe said:

Or just pick a big gobal fund (the sharia one) and have it done by default. Or does the sharia come bundled with some other garbage? I forget now....

No they re saying (pardon me csg if im wrong) that a lot of your money will be invested for at least 15 years so why would you tie such a large amount of it in bonds for that time when it shoudl be in equities.

On your second point - the answer was because I was aiming for 70/30 between equities and bonds? Are you saying that mix is too conservative?

Appetite for risk should be influenced by the length of the investment period. A 'cautious' 20 year old with a 50 year investment journey ahead would just be throwing money away by owning any gilts / bonds. They have the timescale to ride out a number of crashes, recessions & other events so don't need to accept a performance drag for downside protection they don't need. A nervous 20 year old would be best served by a 100% equity portfolio and a disinterest in the markets.

I agree but it should also be based on the likelihood that the investor isn't disinterested in the markets and begins to dabble when things are looking tough. Its the hard bit to judge before you see it unfold before your eyes and based on the number of panicked posts around March this year disinterested investors of any age can become very interested all of a sudden when things take a turn for the worse.

Yes there was a lot of posts on the lines of 'it has gone down 25% should I sell now before it goes to zero '

csgohan4

danlightbulb said:

NottinghamKnight said:

Gilts have performed well over the last decade as interest rates have fallen, so capital values have risen. There's a desire for safety and security and uk debt ticks the box for many, with negative yields now then the likelihood of future capital increase is far lower, indeed if interest rates rise then capital losses are almost guaranteed.

In the short term I think its looking unlikely that UK interest rates will rise. They have created a big problem here, any significant rises in interest rates now will really hurt people mortgaged up to the hilt and they wouldn't want to undermine the property market if they can help it.

However your post reads as if bonds are possibly in a bubble now themselves? In which case, what does one decide to do with the 30% they need to hold in bonds? You seem to be suggesting they are more likely to go down from here, in which case now would be a silly time to move a big chunk of cash into bonds?

I have 13 bond funds I can choose from, of which 7 are solely UK Government bonds funds. The rest are either corporate bonds or a mix of corporate and government bonds. Here they are:



There is a wide range of performance here. The top ones are returning around 10% per year and are doing better than many equity funds. However many of them have some quite low dips in the middle years, with a couple even showing some negatives. That is quite a variance for something meant to be low risk and stable! Indeed, notice one of the funds is badged as 'pre-retirement'. That particular one hasn't gone negative but its hardly a pre-retirement fund with growth of 8% average over the past five years!?

This makes it difficult to know what to do here. I would have hoped to see the bond funds all at middling performance and steady, consistent. This volatility is concerning especially if we are in a bond bubble.

As you can see, I also don't have many/any options for diversified bond funds. The LGIM pre-retirement fund seems to invest in a mix of government and corporate bonds, 70% UK but also globally. However would it right to invest in a fund meant to be for 'pre-retirement', at this stage?

If you look at your own post, what does the top 10% bond you mentioned have in terms of maturity date? It isn't something you dump in and can take out in 5 years is it?

Again depending on your risk appetite you would adjust your % of your investments accordingly to bonds and equities, how much is your call. 

if your feeling frivolous, try SMT

danlightbulb

csgohan4 said:

danlightbulb said:

NottinghamKnight said:

Gilts have performed well over the last decade as interest rates have fallen, so capital values have risen. There's a desire for safety and security and uk debt ticks the box for many, with negative yields now then the likelihood of future capital increase is far lower, indeed if interest rates rise then capital losses are almost guaranteed.

In the short term I think its looking unlikely that UK interest rates will rise. They have created a big problem here, any significant rises in interest rates now will really hurt people mortgaged up to the hilt and they wouldn't want to undermine the property market if they can help it.

However your post reads as if bonds are possibly in a bubble now themselves? In which case, what does one decide to do with the 30% they need to hold in bonds? You seem to be suggesting they are more likely to go down from here, in which case now would be a silly time to move a big chunk of cash into bonds?

I have 13 bond funds I can choose from, of which 7 are solely UK Government bonds funds. The rest are either corporate bonds or a mix of corporate and government bonds. Here they are:



There is a wide range of performance here. The top ones are returning around 10% per year and are doing better than many equity funds. However many of them have some quite low dips in the middle years, with a couple even showing some negatives. That is quite a variance for something meant to be low risk and stable! Indeed, notice one of the funds is badged as 'pre-retirement'. That particular one hasn't gone negative but its hardly a pre-retirement fund with growth of 8% average over the past five years!?

This makes it difficult to know what to do here. I would have hoped to see the bond funds all at middling performance and steady, consistent. This volatility is concerning especially if we are in a bond bubble.

As you can see, I also don't have many/any options for diversified bond funds. The LGIM pre-retirement fund seems to invest in a mix of government and corporate bonds, 70% UK but also globally. However would it right to invest in a fund meant to be for 'pre-retirement', at this stage?

If you look at your own post, what does the top 10% bond you mentioned have in terms of maturity date? It isn't something you dump in and can take out in 5 years is it?

Again depending on your risk appetite you would adjust your % of your investments accordingly to bonds and equities, how much is your call. 

if your feeling frivolous, try SMT

Hi. Im not sure I understand what you're saying to be honest. To my knowledge they are bond funds, so Im not buying the actual bonds - so I don't think Im locked in to the fund for the full maturity period? I could be wrong though.

@Sailtheworld if I'd have had options like this when I first started in the scheme 16 years ago then probably going 100% on equities would have been the right answer. My scheme didn't work that way though, the first decade or so it was all in house run and they managed the investment, then about 6 years ago they outsourced the management to blackrock and we got access to the ability to manage our own fund, then a few years ago it transferred to Aegon, not sure the exact detail but maybe they merged or something. So its only been for 6 years that we've been able to select our own funds. Everyone was put in the same default funds initially, with roughly a 70/30 equity/bonds split and most people haven't ever changed away from the default allocation. I'm 40 now so I don't think going 100% on equities is a good idea.

However if you look at the bond funds, alot of them have performed just as well as equity funds and I don't understand that, because they are meant to be lower risk/lower returns than equity funds.

The issue I have is that in order to get my equity mix better I have to come out of the funds Im currently in completely. So that means I then need to also specify my own bonds funds, which is what Im now having difficulty understanding, and people in the last couple of pages have kept jumping back to equities.

danlightbulb

Hi me again.

Thanks for help so far.

I have been looking through the available bonds funds. The crux of the problem is this:

• Im currently in a multi-asset fund which has a mix of government and corporate bonds, commodities, property, cash, high yield bonds AND emerging/small cap equities. I will need to come out of this to get my larger equities investment mix to work properly, and also I don't see the point in holding any cash at this stage.

This is the current hodge podge in the multi asset fund which is the Blackrock Market Advantage. This fund is also nearly the worst performing fund out of all the ones I can choose from, ranking 79th out of 83 funds available to me, over the past 5 years. Note I have 30% of my total investment tied up in this fund, with the other 70% currently in the Blackrock 50/50 Global Equity index which for the avoidance of doubt does not contain any bonds - its 50% UK equities/50% global equities.



There are no other multi-asset funds available to me which:

• ditch the cash holdings
• simplify the bonds holdings
• Also there are no funds which I can invest in directly for property, commodities or high yield bonds - I would have to use a multi-asset fund if I wanted to include these.

I am therefore proposing to invest directly into two funds which only have bonds. The first only has UK government index linked bonds, and the second has global corporate bonds. Here are these two funds and their top 10 holdings:



I am suggesting to put 15% in the UK government bonds fund and 10% in the corporate bonds fund.

That will leave the final 5% to put in a specific emerging equities fund, as without the multi-asset fund I will have no emerging markets in my other equities funds.

So this would leave me with the following complete portfolio:



To achieve the above I have to use five separate funds as follows:


What do people think of this please, I'd really appreciate views. We've talked alot about the equities but really Im more concerned now about the bonds side - is that 25% on the right invested appropriately? What about all those little bits of investments (commodities, property, high yield) that were in the (poorly performing) multi-asset fund?

Thanks

bowlhead99

The professionally constructed mixed asset portfolio had within its non-equities piece: , cash, property, commodities, bonds. 

Cash won't give any return but is probably held for liquidity or to take tactical / opportunistic exposure to certain market conditions and tied to the fact that some of the underlying positions will be via derivatives so the money paid into the fund by investors is not all directly invested in the underlying asset classes providing the risk exposure. It can therefore just sit in the fund's bank account (or in a cash fund, or short term liquid assets) while it is not being used from day to day.

There is no particular reason to exclude property as an asset class from the overall allocation, though in this fund they will do it by tracking an index of real estate investment trusts so may get high levels of volatility from it (because the exposure is basically from equities of property-holding companies). A single digit percentage wouldn't be unexpected in a mixed asset portfolio.  

Commodities are held as a play on general economic growth, but some of them will do better in boom times, such as industrial metals, energy(oil); others better in uncertainty, e.g. gold price rally will have helped them while oil and stocks were falling; gold became more attractive as bond yields on offer fell and equities appeared very unstable.  You don't necessarily need commodities in a broad portfolio but a few percent doesn't generally hurt; the lack of correlation with other asset classes may improve the portfolio's overall volatility without sacrificing a great deal of performance, but if you are just looking for the best long term growth and don't care too much about volatility, you might prefer to just have more equities. 

For the 'bonds' asset class, there are a whole variety of different sub-classes:
For government bonds you could have UK government, international government (developed markets), international government (emerging markets), index linked (UK and overseas).
For corporate bonds you could have investment grade or higher yield.
For all those classes of bond you could have shorter dated bonds or longer maturity bonds, with the longer ones (e.g. 15-40 years) usually having better yields, but also greater value sensitivity to interest rates than shorter ones (eg less than 3-5 years).
For the bonds issued by foreign companies or governments, you might like to have them hedged to sterling so you get a diversity of interest rates but don't get the exchange rate swings that you're already getting from your international equities. For example in their last year-end report, the Market Advantage fund you mentioned has £30m+ of Canadian index linked bonds and £8m+ of Swedish index linked bonds, but also had £30m+ of GBP vs CAD and £8m+ GBP vs Krona  currency contracts. 

Different types of bonds have different properties - interest rate sensitivity, credit risk, correlation of values with equities etc and may be of relatively higher or lower usefulness in different parts of an economic cycle; the relative value of holding them - for either a return or for risk reduction - is something that might be expected to change over time. 

To decide that you don't know what you are doing with bonds so you will just arbitrarily put 3/5ths of your bond money in UK index linked bonds and the other 2/5ths in a mix of global corporate investment grade long maturity bonds, because those are two types of funds that happen to exist among your 80+ pension funds available, and you decided the split between them as a coin toss, and you won't bother with anything in the other sectors... seems, I dunno, less than satisfactory... given you have taken some time to figure out what you are doing with the equities side and your bonds allocation is not insubstantial (a third of the size of the equities).

If:
- your pension manager does not offer a whole smorgasbord of specialist bond funds... 
- because people in workplace pension schemes do not generally pass themselves off as credit investment specialists and do not want to construct their own delicately balanced and periodically rebalanced allocation out of specialist bond-fund building blocks...
- and therefore a broader selection of bonds is only available to you within your pension by buying some other mixed asset funds, where a fund manager will have concocted a particular mix of bonds within the overall portfolio using some expertise... or at least some logic...
- then perhaps it could make sense to use a mixed asset fund after all. 

danlightbulb

@bowlhead99 thanks.

My initial allocation wasn't entirely arbitrary, I attempted to get a close match to the bonds side of the Vanguard Life Strategy 80/20 fund, using the funds I had available to me.

I agree that it seems to make sense to use a multi-asset fund however there are a number of significant issues with the ones I have available to choose from:

• Out of the 83 funds available, only seven of them are multi-asset funds. Of these seven, three are very small funds, under £5m.
• Out of the 83 funds, the multi-asset funds are ranked 67th, 70th, 77th, 78th, 79th, 81st and 82nd for 5-year average performance. So compared to almost all the other funds available, including the dedicated 'low risk' bond funds, they don't return very well.
• The fees are higher than the majority of the other funds available.
• All the multi-asset funds also contain quite alot of equities themselves - making it more difficult to balance my portfolio if I'm separately defining the equities side.
• Some funds contain assets I don't really want, like metals and high yield (junk) debt.

Here are the multi-asset funds I have to choose from: