Using LifeStrategy 20 as a Bond Fund

masonic

aroominyork said:

So is a valid objective to seek capital growth from bonds, rather than just distribution income? Is lower risk (lower yield) from a manager who can consistently deliver some growth, preferable to higher yield with no growth, since you are better positioned in a downturn?

Yes I would say it is a valid objective. It may not be possible to do consistently because it relies on inefficiencies in the market, but if it allows a fund to be composed of higher quality assets which will hold up better in a downturn then that would be a good place to be. Bond markets overreact to news just as stockmarkets do, so there will be opportunities to acquire them at more favourable prices from time to time. The trouble is that many of these funds have mandates that stretch well beyond that into a more sweeping change of asset allocation to suit the manager's outlook for the economy, and when those calls go wrong they can magnify losses in a downturn.

aroominyork

This has been a very helpful thread which, for the first time, has given me a reasonable understanding of fixed interest. The most important learning point is how gilts/govt bonds and corporate bonds are too easily combined within the term ‘fixed interest’ to represent the main non-equity part of a portfolio. It seems to me they are very different animals: corporate bonds might track equities in a less volatile way, while gilts are what you need if you want real diversification and protection in an equity downturn.

This makes it surprising that iShares’ IGLH seems to be the only product which gives hedged exposure to global govt bonds. Although IGLH has only been around a few years, this chart shows how it provides a smoother ride than purely UK or US govt bonds. Why is a hedged global govt bond product not in higher demand and more widely available?

JohnWinder

It seems to me they are very different animals: corporate bonds might track equities in a less volatile way, while gilts are what you need if you want real diversification and protection in an equity downturn.

Here's a difference to unsettle you too: individual shareholders vote on how companies are run, and/or vote in who sits on the board of directors. Bond holders of that company have no vote. When push comes to shove, in whose interests do we think the shareholders will be voting: shareholders' or bond holders'? That can't happen with government bonds.

tebbins

Vanguard offer a hedged global bond index fund which is about 2/3 government 1/3 corporate & ABS/MBS.

Shareholders cannot vote against bondholders. When companies go bankrupt debtors and taxes come first, the owner (s) come second. That is how it works in the UK and in most economies that have a capital market open to international investment. Also shareholders and bondholders tend to be the same people.

aroominyork

tebbins said:

Vanguard offer a hedged global bond index fund which is about 2/3 government 1/3 corporate & ABS/MBS.

Exactly my point. Govt and corporate bonds are too often combined in bond index funds.

Wonky_Dan

I thought I'd drag this back up in the hope of some advice. I'm mid 30's and I've been looking to start adding some bonds into my SW workplace pension to diversify, eventually getting to an 80/20 split. I've currently got the equity portion allocated as per global market cap which I'm happy with.

The core funds that I have access to are either a passive corporate bond fund, UK index linked gilt fund or standard gilt fund. I've started building a position slowly in the passive UK Gilt fund now that prices are starting to drop a bit and yields rising. I understand the potential intrest rate risk with these.

Ideally I feel that I'd like a global government bond fund for further diversification, however there are none available to me, other than expensive and/or actively managed strategic funds. I have the access to the Threadneedle Global Bond fund which would work out in the region of 0.7% which feels a bit too expensive for me. Alternatively I have Lifestrategy 20 which would cost me 0.58% a year.

My question really is would the LS20 at that cost be worth adding for some extra diversification or should I just stick with gilts, or perhaps a 50:50 inflation linked gilt : standard gilt split for some sort of inflation protection? I know I'm very late the index linked bond party...

Linton

Wonky_Dan said:

I thought I'd drag this back up in the hope of some advice. I'm mid 30's and I've been looking to start adding some bonds into my SW workplace pension to diversify, eventually getting to an 80/20 split. I've currently got the equity portion allocated as per global market cap which I'm happy with.

The core funds that I have access to are either a passive corporate bond fund, UK index linked gilt fund or standard gilt fund. I've started building a position slowly in the passive UK Gilt fund now that prices are starting to drop a bit and yields rising. I understand the potential intrest rate risk with these.

Ideally I feel that I'd like a global government bond fund for further diversification, however there are none available to me, other than expensive and/or actively managed strategic funds. I have the access to the Threadneedle Global Bond fund which would work out in the region of 0.7% which feels a bit too expensive for me. Alternatively I have Lifestrategy 20 which would cost me 0.58% a year.

My question really is would the LS20 at that cost be worth adding for some extra diversification or should I just stick with gilts, or perhaps a 50:50 inflation linked gilt : standard gilt split for some sort of inflation protection? I know I'm very late the index linked bond party...

I feel you are concentrating on the wrong things.  You seem to be very concerned aboutr the fees but you are happily moving from 100% equity to 80% equity.

Over the past 10 years VLS100 has averaged 12% return per year, VLS80 10.4% return per year.  So the difference in  return between a 100% equity and the corresponding 80/20 one was more than 10 times the difference in charges between the 2 funds you mention.

I am unclear as to why you want 20% bonds.  What do you think it will give you?  Once you have determined that perhaps it will be more obvious as to which bond fund (if any) you should choose.  It is more importrant that the funds you choose match your objectives than what the charges are.

Wonky_Dan

Linton said:

Wonky_Dan said:

I thought I'd drag this back up in the hope of some advice. I'm mid 30's and I've been looking to start adding some bonds into my SW workplace pension to diversify, eventually getting to an 80/20 split. I've currently got the equity portion allocated as per global market cap which I'm happy with.

The core funds that I have access to are either a passive corporate bond fund, UK index linked gilt fund or standard gilt fund. I've started building a position slowly in the passive UK Gilt fund now that prices are starting to drop a bit and yields rising. I understand the potential intrest rate risk with these.

Ideally I feel that I'd like a global government bond fund for further diversification, however there are none available to me, other than expensive and/or actively managed strategic funds. I have the access to the Threadneedle Global Bond fund which would work out in the region of 0.7% which feels a bit too expensive for me. Alternatively I have Lifestrategy 20 which would cost me 0.58% a year.

My question really is would the LS20 at that cost be worth adding for some extra diversification or should I just stick with gilts, or perhaps a 50:50 inflation linked gilt : standard gilt split for some sort of inflation protection? I know I'm very late the index linked bond party...

I feel you are concentrating on the wrong things.  You seem to be very concerned aboutr the fees but you are happily moving from 100% equity to 80% equity.

Over the past 10 years VLS100 has averaged 12% return per year, VLS80 10.4% return per year.  So the difference in  return between a 100% equity and the corresponding 80/20 one was more than 10 times the difference in charges between the 2 funds you mention.

I am unclear as to why you want 20% bonds.  What do you think it will give you?  Once you have determined that perhaps it will be more obvious as to which bond fund (if any) you should choose.  It is more importrant that the funds you choose match your objectives than what the charges are.

I just feel like it would be a sensible thing to do to start building a position slowly in something other than pure equities. I'll not be swapping to 80:20 straight away, just a slow build up over a few years as I get older. My workplace pension is my largest saving vehicle for retirement so I look at it as building a less volatile holding as I work my way towards 40. I realistically want to retire earlier than state pension age if possible.

If we hit a big crash and I'm 100% equities in my 40's that could potentially take a decade to recover, I don't think I'd be too pleased with myself. Also wih the current uncertainty in everything, doing this slowly makes more sense to me rather than selling 20% of my equities and dumping it all in Gilts in 1 go.

Wonky_Dan

Wonky_Dan said:

Linton said:

Wonky_Dan said:

I thought I'd drag this back up in the hope of some advice. I'm mid 30's and I've been looking to start adding some bonds into my SW workplace pension to diversify, eventually getting to an 80/20 split. I've currently got the equity portion allocated as per global market cap which I'm happy with.

The core funds that I have access to are either a passive corporate bond fund, UK index linked gilt fund or standard gilt fund. I've started building a position slowly in the passive UK Gilt fund now that prices are starting to drop a bit and yields rising. I understand the potential intrest rate risk with these.

Ideally I feel that I'd like a global government bond fund for further diversification, however there are none available to me, other than expensive and/or actively managed strategic funds. I have the access to the Threadneedle Global Bond fund which would work out in the region of 0.7% which feels a bit too expensive for me. Alternatively I have Lifestrategy 20 which would cost me 0.58% a year.

My question really is would the LS20 at that cost be worth adding for some extra diversification or should I just stick with gilts, or perhaps a 50:50 inflation linked gilt : standard gilt split for some sort of inflation protection? I know I'm very late the index linked bond party...

I feel you are concentrating on the wrong things.  You seem to be very concerned aboutr the fees but you are happily moving from 100% equity to 80% equity.

Over the past 10 years VLS100 has averaged 12% return per year, VLS80 10.4% return per year.  So the difference in  return between a 100% equity and the corresponding 80/20 one was more than 10 times the difference in charges between the 2 funds you mention.

I am unclear as to why you want 20% bonds.  What do you think it will give you?  Once you have determined that perhaps it will be more obvious as to which bond fund (if any) you should choose.  It is more importrant that the funds you choose match your objectives than what the charges are.

I just feel like it would be a sensible thing to do to start building a position slowly in something other than pure equities. I'll not be swapping to 80:20 straight away, just a slow build up over a few years as I get older. My workplace pension is my largest saving vehicle for retirement so I look at it as building a less volatile holding as I work my way towards 40. I realistically want to retire earlier than state pension age if possible.

If we hit a big crash and I'm 100% equities in my 40's that could potentially take a decade to recover, I don't think I'd be too pleased with myself. Also wih the current uncertainty in everything, doing this slowly makes more sense to me rather than selling 20% of my equities and dumping it all in Gilts in 1 go.

Just to add, as with the passive market cap weight of my equities, I thought doing the same with my FI would be a good idea too.

Linton

Wonky_Dan said:

Linton said:

Wonky_Dan said:

I thought I'd drag this back up in the hope of some advice. I'm mid 30's and I've been looking to start adding some bonds into my SW workplace pension to diversify, eventually getting to an 80/20 split. I've currently got the equity portion allocated as per global market cap which I'm happy with.

The core funds that I have access to are either a passive corporate bond fund, UK index linked gilt fund or standard gilt fund. I've started building a position slowly in the passive UK Gilt fund now that prices are starting to drop a bit and yields rising. I understand the potential intrest rate risk with these.

Ideally I feel that I'd like a global government bond fund for further diversification, however there are none available to me, other than expensive and/or actively managed strategic funds. I have the access to the Threadneedle Global Bond fund which would work out in the region of 0.7% which feels a bit too expensive for me. Alternatively I have Lifestrategy 20 which would cost me 0.58% a year.

My question really is would the LS20 at that cost be worth adding for some extra diversification or should I just stick with gilts, or perhaps a 50:50 inflation linked gilt : standard gilt split for some sort of inflation protection? I know I'm very late the index linked bond party...

I feel you are concentrating on the wrong things.  You seem to be very concerned aboutr the fees but you are happily moving from 100% equity to 80% equity.

Over the past 10 years VLS100 has averaged 12% return per year, VLS80 10.4% return per year.  So the difference in  return between a 100% equity and the corresponding 80/20 one was more than 10 times the difference in charges between the 2 funds you mention.

I am unclear as to why you want 20% bonds.  What do you think it will give you?  Once you have determined that perhaps it will be more obvious as to which bond fund (if any) you should choose.  It is more importrant that the funds you choose match your objectives than what the charges are.

I just feel like it would be a sensible thing to do to start building a position slowly in something other than pure equities. I'll not be swapping to 80:20 straight away, just a slow build up over a few years as I get older. My workplace pension is my largest saving vehicle for retirement so I look at it as building a less volatile holding as I work my way towards 40. I realistically want to retire earlier than state pension age if possible.

If we hit a big crash and I'm 100% equities in my 40's that could potentially take a decade to recover, I don't think I'd be too pleased with myself. Also wih the current uncertainty in everything, doing this slowly makes more sense to me
rather than selling 20% of my equities and dumping it all in Gilts in 1 go.

So you want protection against a crash.  You say you want to retire earlier than SP age.  How much earlier?  5 years ealier would make you 63, still another 25 years or so to go.  There probably will be at least two major crashes in 25 years, but you will for most of that period have room for your 10 years recovery aided by your ongoing purchase of cheap fund units.

A big equity crash could be 50%, and we can assume that your bonds remain constant,  So an 80/20 portfolio would fall by 40% whereas a 100% equity portfolio would fall 50%.  Is the difference significant?  Is it worth sacrificing say 1.6%/year return to achieve?  You run the risk of losing more on your precautions than you would in a crash.

Perhaps it would be more sensible to review the situation in 10-15 years time and perhaps start to move significant money into cash or and/or go for a 60/40 split.