Going up or down with bond risk.

ChilliBob

I've been reading up on the role of bonds, which makes at lot of sense, but, in the current conditions isn't overly attractive at the moment. 

I get the points about more steady equities, eg. Unilever has been suggested, alongside say commodities as above. 

Do any of these have the inverse correlation bonds have with equities in general thou? I'm guessing something like Unilever obviously doesn't, it has a positive correlation, but won't be as volatile.

So I guess this boils down to does anything have the negative correlation bonds have? 

csgohan4

Bonds aren't really what they used to be in terms of a shield against recession. Their poor yields are not a selling point either. I am 100% in equities at present, but When I dial down my risk, it will likely be in PBs, cash e.t.c. But WP funds/IT's will be the other thing to consider. They have done well and rided out the storm. 

ChilliBob

Wp funds?

Side note, I found this video regarding Bonds quite interesting https://youtu.be/RWrRVvPey1Q

I've watched a couple of that guys videos, quite like them. 

Imy mix so far is cash (fixed, variable, notice, pbs) and I intend equities, beyond that I'm not too sure/undecided 

Thrugelmir

ANGLICANPAT said:

 since Im in my earlyish 70's   --then  should I be thinking about going up a risk level for a while, hence ditching  a % of bonds ,  to help minimise my losses if bonds are likely to crash horribly , but hopefully not equities to the same degree at the same time? 

How much risk do you actually need to expose yourself too? What's your personal objective? Equities are prone to far more volatility than bonds. Interest rates may only edge upwards very slowly. 

bowlhead99

ChilliBob said:

Wp funds?

There are some funds or investment trusts that focus more on 'wealth preservation' rather than outright growth, and have done a reasonable job over the years.

For example the Personal Assets Trust's remit is to protect and increase (in that order) the value of shareholders' funds per share over the long term. 

There are others such as RIT Capital Partners that are not strictly 'wealth preservation' but have significant amounts of capital invested for their founding family and will position their holdings relatively more cautiously at some points in the economic cycle based on a strategic view, with the aim of achieving long term growth without too much volatility from a mixed bag of different types of holdings.

Still, although some might see actively managed 'wealth preservation' funds as almost a separate asset class, they are not really - they're basically mixed asset funds which invest more cautiously when they believe circumstances dictate, but are achieving that 'cautious' stance by using cash, bonds, treasuries, index linked securities and so on, and perhaps some commodities such as gold, alongside the equity based investments that they also hold. 

Some of what they have achieved in recent decades (growth helped by not losing too much even in the bad times) will have been helped by the bond bull markets - and so if you think the bond bull markets are over, there would be implications for the ongoing success of such funds. There is no point saying you want to get rid of bond exposure and then buying a fund that aims to protect losses by holding bonds. If they are using bonds and cash and gold, you could do the same yourself within your broader portfolio. But it is nice to have someone worry about the allocations rather than do it yourself, which is why people like active mixed asset funds if they don't 'trust' indexes or fixed allocations 

ChilliBob

That's really interesting, thanks. I'll give those type of funds a look at some point along with commodities, which as of yet I've sort of ignored in favour of focusing my research on global trackers and tax

Albermarle

Possibly another non equity alternative are infrastructure funds as part of a wider portfolio.

bowlhead99

Albermarle said:

Possibly another non equity alternative are infrastructure funds as part of a wider portfolio.

Yes, infrastructure stuff (whether PPF projects or other type of company or operating asset) often combine some of the properties of bonds (long term stable cash generation which may be contractually backed by government or regulated in some way and perhaps linked to inflation) with equity/property upside potential (a productive asset has a market value linked to profitability, and may sit on a piece of owned real estate).  Some infrastructure will be linked to economic activity levels and could be cyclical (e.g. ports and logistics, transport) while others not so much (e.g. water works, prisons, health sector).  And the operating businesses held by an infrastructure fund are owned on a reasonably long-term, private-equity basis  and their values aren't driven by short-term whims of the market looking at quarterly results, so may not be too volatile.

So with a combination of equity-like returns and debt-like returns and exposure to cyclical and noncyclical, while not being too volatile, they can be a good diversifier for a portfolio - I hold HICL and INPP among other more specialist holdings. Of course, they have their own risks (e.g. utilities can be heavily regulated markets which can restrict sales pricing or impose costs, and the assets are often large capital projects so can be leveraged which provides a risk if things go wrong and it's expensive to refinance etc).

And the fact the assets might be valued on a 'discounted cash flow analysis' of very long term prospective future returns may lead to significant value changes if interest rates (and discount rates) change.  If you think of an infrastructure project generating annual dividend cashflows as a 'bond proxy', then if prevailing interest rates change, the  open market value of the company or project generating that annual cashflow per £ invested will get hammered down just like a bond price would get hammered.

MaxiRobriguez

ANGLICANPAT said:

With all the talk of  bonds overheating ,  not doing their balancing job,  boiling over, about to crash etc   ,  if I had been going to  invest in  the low end risk level of a global multi asset fund  , sacrificing  growth for preservation ( theoretically)   since Im in my earlyish 70's   --then  should I be thinking about going up a risk level for a while, hence ditching  a % of bonds ,  to help minimise my losses if bonds are likely to crash horribly , but hopefully not equities to the same degree at the same time? 

The talk around a potential bond crash is because yields are low, and therefore any return of inflation and interest rate rises would result in a shift away from bonds as people move more money into standard bank accounts. That would reduce the price of the bonds as more sellers than buyers.

In terms of shifting your allocation to protect against that possibility, the answer is to not add more equities, as equities could also be vulnerable in that scenario. Better idea would be to have some allocation to gold and cash which should gain in an inflationary scenario and reduce volatility respectively.

As always, a portfolio based on risk appetite which is rebalanced semi regulary is a sensible approach for the vast majority of people. For older people who cannot tolerate volatility or large losses, then a smaller % of equities and a mix of of bonds/cash/gold is advised. Don't drop the equity allocation entirely as they're still a good bet for growth.

C_Mababejive

Why worry about these matters? Just keep investing in a multi asset fund that corresponds with your comfort level and situation with regard to risk. Let fund managers manage/let indexes flop up and down as is their want.