Using LifeStrategy 20 as a Bond Fund

older_and_no_wiser

As someone who's unsure of what bond fund(s) to invest in as part of a retirement portfolio, would simply choosing the Vanguard LifeStrategy 20 be a good move? This is obviously 80% bond funds of different durations, grades etc. It's trusting in Vanguard to pick the right mix.

I currently have around 90% of my pension SIPP portfolio in equities (trackers and higher risk multi asset funds mainly). As I've posted recently, my retirement pot and other investments/cash should far outlive me and I have no legacy requirements and also 2+ years of cash savings. I plan to retire in approx 5-6 years (age 57/58) and will go into flexi drawdown. So potentially, I may not need any further stabilizing (bond) element.

I'm just curious if the LS20 approach to bonds is a plan - even if not for me, for others. Would it be better to pick a couple (or more?) individual bond funds instead?  But then back to square one of which ones to pick??

dunstonh

As someone who's unsure of what bond fund(s) to invest in as part of a retirement portfolio, would simply choosing the Vanguard LifeStrategy 20 be a good move? 

not really as it has 20% equities.

This is obviously 80% bond funds of different durations, grades etc. It's trusting in Vanguard to pick the right mix.

Vanguard doesn't have the best trackers in every area.  It's fixed interest securities can be more volatile than others.  So, if its risk reduction you are after, others may make a better job on the bonds side.  Although not necessarily the gilt side.

masonic

A portfolio containing 20% equities and 80% bonds will generally be lower risk and higher return than an equivalent portfolio containing just the bonds, so it could make sense as a self contained solution. However, multi-asset funds generally have higher charges than the cheapest bond funds, and if you are already holding equities separately an extra slice in a multi-asset fund may be superfluous. I think the likes of L&G and HSBC look more interesting on the low risk end of the spectrum than Vanguard.

If 90% of your portfolio is in equities, then I don't think just 10% bonds is going to noticeably bring down the volatility, but it will slightly reduce long term returns, so I don't see what you'd be gaining by going 90% instead of 100% equities. However, if you want some sort of medium term access pot, containing money you may need in a few years time (to utilise when equities have crashed), then your idea makes good sense.

older_and_no_wiser

Thanks for the comments so far. I understand the views about possible risks of adding another 20% equities in that LS20 fund and that Vanguard not perhaps being the best bond option with that fund.

So back to the original conundrum of which bond fund(s) if the objective is guarding against market crash impact in a high percentage equities based portfolio. Assuming a 10+ year investment timeline, one could take the Lars Kroijer approach and opt for a single(?) local currency fund of UK government bonds with dates matching the investment duration. Alternatively there are strategic funds (eg Jupiter, Allianz). These have sightly higher ongoing charges and are actively managed. Is active management a positive with bonds? It's not generally advised with equities unless on a small portion of your portfolio.

masonic

Have you checked the yield to maturity on UK government bonds bought today? Anything under 10 year duration can be beaten by an instant access savings account. It's unlikely there will be further capital gains to be had on long dated gilts. GBP hedged global bonds perhaps have slightly better prospects.

On the active side, there are also a number of funds investing in a more diversified manner with a capital protection objective, see examples in https://www.thisismoney.co.uk/money/news/article-7489303/Want-investments-ready-time-Defensive-Dozen.html

older_and_no_wiser

Here's a Trustnet comparison chart showing the 2 year performance of a couple of strategic bond funds and the Vanguard Global Agg. bond fund v a global equity share tracker (Fidelity). Interesting to see how they all performed during the pandemic "crash".

If someone had a long enough investment timeframe and held tight during any crash with enough cash to ride it out (2+ years), is there even a reason to hold bonds? We know from history, that the market will always recover and (eventually) go higher. Also, as @masonic says, safe long term government bonds are producing very little yield. 

Prism

older_and_no_wiser said:

If someone had a long enough investment timeframe and held tight during any crash with enough cash to ride it out (2+ years), is there even a reason to hold bonds? We know from history, that the market will always recover and (eventually) go higher. Also, as @masonic says, safe long term government bonds are producing very little yield. 

People often refer to have cash to cope with a 2+ year crash and recovery. A long equity down turn, like 1969 or 2000 can take 10 years plus to crash and recover so 2 years of cash to go with 100% equities will barely help. Maybe 2 years cash plus a good percentage of government bonds would do it. Nothing wrong with lower returns if your main goal is not to run out of money.

masonic

The pandemic crash was fairly atypical as both the decline and recovery were extremely rapid. Historic crashes have involved up to 2 years of declines followed by up to 10 years to get back to the previous peak. Defensive assets are there to stop people (a) panic selling when they look at their balance, and (b) being forced to sell near the bottom to meet their spending needs. Someone who won't panic and won't need to sell anything for 10+ years could opt to go 100% equities.

Edit: crossed with Prism

tebbins

Generally, because bonds and equities are uncorrelated, a fund such as VLS 20 or 40 should be less volatile than a 100% bond fund, I think i worked out a while ago that the optimum using Barclays Equity Gilts Study and S&P500/US treasury data was around 1/3 bonds 2/3 equities (but it's not much different if you go down to 30, 25 or even 20% equities). But i think this is only true through around half of volatile periods.
However:
1. Across the bond and equity elements, the VLS range invest in 20-25% UK equities and bonds, the rest unhedged global equities and hedged global bonds. So currency volatility also comes into effect.
2. The VLS range hold long term, low-yielding European, Japanese and other government bonds. These will be more volatile, and if the yield is much below 0.5%, guaranteed to earn you 0% or less.
3. Vanguard have a US government bond fund hedged into GDP, with a yield around 1.1-1.2% (treasury . gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield) over an 8 year maturity. This is much less volatile and higher yielding, though not much better than cash. If you want safe, low volatility bonds, I personally would go with that.
4. The VLS range also do not hold inflation-linked bonds. Whether you want to hold these is a whole other debate, the target retirement fund range does hold individual, short-duration inflation-linked gilts i.e. not in a fund as with its other holdings. Depending on your investment platform you could buy such individually, or iShares offer a range of UK and hedged US inflation-linked bond funds.

masonic

tebbins said:

3. Vanguard have a US government bond fund hedged into GDP, with a yield around 1.1-1.2% (treasury . gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield) over an 8 year maturity. This is much less volatile and higher yielding, though not much better than cash. If you want safe, low volatility bonds, I personally would go with that.

This is an interesting approach, although looking at current data, the effective yield to maturity at the end of July was 0.8%, and a Trustnet comparison report puts the 3 year volatility at 4.4% vs 3.1% for a currency hedged global bond tracker (I used the iShares one, AGBP). It could be useful if wishing to avoid certain geographic regions.

tebbins

masonic said:

tebbins said:

3. Vanguard have a US government bond fund hedged into GDP, with a yield around 1.1-1.2% (treasury . gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield) over an 8 year maturity. This is much less volatile and higher yielding, though not much better than cash. If you want safe, low volatility bonds, I personally would go with that.

This is an interesting approach, although looking at current data, the effective yield to maturity at the end of July was 0.8%, and a Trustnet comparison report puts the 3 year volatility at 4.4% vs 3.1% for a currency hedged global bond tracker (I used the iShares one, AGBP). It could be useful if wishing to avoid certain geographic regions.

The 0.8% is at the end of June, the treasury website provides more up to date and accurate yield information, as do iShares funds (e.g. GOVT). For some reason both Vanguard and iShares show numbers below what treasury.gov shows, perhaps they net off the OCF + transaction costs?
In any event you get a higher yield with the same lack of currency risk, less interest rate/maturity volatility, and a comparably creditworthy government.