Question about bonds

me107

I am constructing my own version of LS via Vanguard. Can i please canvass views on whether Vanguard's Global Bond Index Hedge, is the suitable and appropriate 'one-stop' choice of a Bond tracker, to complement FTSE Global All Cap Index Fund?

Have i opted for the "right" choose of Bonds - by that i mean will it appropriately perform the function bonds are supposed to perform in a balanced portfolio, or is there a more appropriate choice of Bond index fund which Vanguard offer?

Audaxer

The VLS funds include various bond funds in different percentages, so Vanguard clearly think it is more diversified having their selection of bond funds at the weightings they have than just the one bond fund.

JohnWinder

With thirteen thousand bonds, government and corporate, from AAA to 20% as BBB or lower, it's pretty diversified. Not to say it's the best choice, as I haven't looked at the alternatives.

One issue is how your stocks/bonds are distributed. Lots in stocks, not much in bonds, and this fund is probably as good as any. If you'll be heavy in bonds, might want to make sure enough are inflation protected and perhaps with varying durations.

It shouldn't give you as much volatility protection as a government bonds only fund, but that's alright if you factor it in.

me107

JohnWinder said:

With thirteen thousand bonds, government and corporate, from AAA to 20% as BBB or lower, it's pretty diversified. Not to say it's the best choice, as I haven't looked at the alternatives.

One issue is how your stocks/bonds are distributed. Lots in stocks, not much in bonds, and this fund is probably as good as any. If you'll be heavy in bonds, might want to make sure enough are inflation protected and perhaps with varying durations.

It shouldn't give you as much volatility protection as a government bonds only fund, but that's alright if you factor it in.

In my ignorance, how would you suggest making sure they are inflation protected and with varying durations?

me107

Audaxer said:

The VLS funds include various bond funds in different percentages, so Vanguard clearly think it is more diversified having their selection of bond funds at the weightings they have than just the one bond fund.

Noted and agreed. I am trying to keep things as simple as possible though, so was looking for a one stop bond fund on Vanguard that would do the job (I don't want to hold VLS itself) without unnecessarily complicating things.

ColdIron

VLS 80 has about

14% Vanguard Global Bond Index Hedged
2% Vanguard U.K Government Bond Index
2% Vanguard U.K. Inflation-Linked Gilt Index

So a fairly good fit, probably closer than your equity fit

will it appropriately perform the function bonds are supposed to perform in a balanced portfolio

Well it will do much the same as it does in the LS fund. But there are many different types of bonds as there are different types of equities. Would you equate US large cap equities with EM smaller companies?

JohnWinder

Each fund specifies the average duration of its holdings; I think yours was 9 years (neither 'long' or 'short' - goldilocks).

A quick glance I didn't see the fund composition specified in terms of inflation linked or nominal, but it's likely a mix reflecting each country's bond issuance - which at a guess would be very little in linkers.

If you read up Bloomberg's description of their index you might find more detail.

If you were relying on a high equity holding to 'deal with' inflation, then the bond side may not matter much. But heavy in bonds, and you might want a decent holding in inflation linked bonds.

Individual bonds vs a bond fund(s) isn't a choice you need to face, but this article might have something towards the latter half. https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

aroominyork

ColdIron said:

VLS 80 has about

14% Vanguard Global Bond Index Hedged
2% Vanguard U.K Government Bond Index
2% Vanguard U.K. Inflation-Linked Gilt Index*

So a fairly good fit, probably closer than your equity fit

*So to get the 'all bond' equivalent within VLS you must multiple by five to get c.10% UK index-linked.

Vanguard's hedged global bond index is not overweight to the UK, while the bonds in VLS are overweight (in a similar way to the equities in VLS). You have chosen not to overweight your equities to the UK so you have to ask yourself the same question about bonds - the answer might not be the same. Personally, I like how a global bond index is less volatile than a UK one, which is why I hold that Vanguard global bond fund.

MX5huggy

For what it is worth (which is very little) I hold both the VG Global equity fund and hedged bond fund with a target allocation of 75/25 in my small ISA. 

ColdIron

aroominyork said:

ColdIron said:

VLS 80 has about

14% Vanguard Global Bond Index Hedged
2% Vanguard U.K Government Bond Index
2% Vanguard U.K. Inflation-Linked Gilt Index*

So a fairly good fit, probably closer than your equity fit

You have chosen not to overweight your equities to the UK so you have to ask yourself the same question about bonds - the answer might not be the same.

I'm not choosing anything, it certainly wasn't my intention. Just observing that if the OP is 'constructing my own version of LS via Vanguard' and wants a 'one-stop' choice then the Global Bond Index is an easy and obvious choice

Personally, I like how a global bond index is less volatile than a UK one, which is why I hold that Vanguard global bond fund.

I agree.

As an aside, I note that HL has recently added it to their Wealth Shortlist if it sways anybodies opinion

aroominyork

ColdIron said:

aroominyork said:

ColdIron said:

VLS 80 has about

14% Vanguard Global Bond Index Hedged
2% Vanguard U.K Government Bond Index
2% Vanguard U.K. Inflation-Linked Gilt Index*

So a fairly good fit, probably closer than your equity fit

You have chosen not to overweight your equities to the UK so you have to ask yourself the same question about bonds - the answer might not be the same.

I'm not choosing anything, it certainly wasn't my intention. Just observing that if the OP is 'constructing my own version of LS via Vanguard' and wants a 'one-stop' choice then the Global Bond Index is an easy and obvious choice

By "you" I meant the OP (sorry for the confusion). But it's worth mentioning that if the OP wants to construct his/her own version of VLS, it should be with about 80% of equities in Global All Cap and the other 20% in a UK All Share index fund.