Alternatives to VGOV

valiant24

I've never previously invested in Gilts, but following advice here and elsewhere, about 9 months ago I rationalised my equity ETFs and Funds - I had about 70 of them! - down to basically VWRP and VGOV.

VGOV is killing me!   It's down 7% since the start of the year.  I can't foresee any circumstances in which it will ever stop dropping in the near of medium term, so I think I am going to bail.   This will be the second time in 9 months I have bailed from Gilts and it's cost me over £100k.

What's the alternative?  Just keep the money in cash in case of an equity drop, or maybe drip the cash slowly back into equities?

Keeping £100ks in cash in my SIPP obviously has counter-party risk, albeit that it's unlikely AJ Bell will go tits.  I seem to remember some suggested Money Market investments, perhaps with Vanguard, that were a slightly better investment than straight cash, even after the management charges - can anyone remind me please?

Thanks as ever
V

Prism

One thing to note about VGOV and in fact many gilt trackers is that they tend to have a high duration - at the moment nearly 14 years. This means they are likely to fall around 14% for every predicted 1% rise in interest rates. However they do tend to do pretty well in an equity crash.

You can shorten the duration by combining with a short dated gilt fund or maybe go for a global hedged government bond fund which tends to have a shorter duration.

valiant24

Prism said:

One thing to note about VGOV and in fact many gilt trackers is that they tend to have a high duration - at the moment nearly 14 years. This means they are likely to fall around 14% for every predicted 1% rise in interest rates. However they do tend to do pretty well in an equity crash.

You can shorten the duration by combining with a short dated gilt fund or maybe go for a global hedged government bond fund which tends to have a shorter duration.

Thanks.  
Maybe I won't crystalise the loss.  If the current inflation spikes are transient (though it doesn't look like it from here!) they'll recover over the medium to long term.
Did you mean 14% per 1% rise?   If interest rates went to 7% VGOV would be wiped out!

JohnWinder

We discussed this last month but it's worth going over.

duration - at the moment nearly 14 years. This means they are likely to fall around 14% for every predicted 1% rise in interest rates.

Did you mean 14% per 1% rise?

That is pretty much the maths of it, but ponder over 'predicted' for a moment. If the bond market predicts that interest rates on long-ish term bonds will rise 1% tomorrow (reflect for a moment on that large jump being pretty unlikely) then those bond prices will drop about 14%. Have a look at a long term chart of bond fund values covering the last 45 years and see that a drop that big has taken weeks to eventuate. And the biggest drops have taken less than 3 years to be made good (if coupons are reinvested).

But how accurate are bond market predictions? Would you rely on them? No.

Secondly, if you omit 'predicted', the maths of 14% price fall for a 1% interest rate rise is nothing more than a description of the price/interest rate relationship taking into account duration. If someone wants to guess at interest rate changes and thus predict bond prices based on that maths, they might as well just predict the bond prices. Doing that is as hard as predicting stock prices, so forget it.

True enough, long duration bonds are 'riskier' than short bonds as they carry more interest rate risk; but for that, you usually get higher yields. Take your pick.

High quality bonds, particularly shorter duration bonds have very stable value relative to other investable assets. And if you look at what happened to bond funds when US 'interest rates' rose dramatically a few years ago, check out the graphs here:

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=366528&newpost=6448253. In short, SFA.

VGOV has a couple of shortcomings (what doesn't?): its duration of 14 years means it will serve you best if your investing horizon is 14 years or more (give or take); it has not a lot of inflation linked bonds, so long term unexpected inflation will damage VGOV. But you've got other assets offering you unexpected inflation protection eg 3 real estate properties etc offering some protection.

GeoffTF

valiant24 said:

I've never previously invested in Gilts, but following advice here and elsewhere, about 9 months ago I rationalised my equity ETFs and Funds - I had about 70 of them! - down to basically VWRP and VGOV.

VGOV is killing me!   It's down 7% since the start of the year.  I can't foresee any circumstances in which it will ever stop dropping in the near of medium term, so I think I am going to bail.   This will be the second time in 9 months I have bailed from Gilts and it's cost me over £100k.

What's the alternative?  Just keep the money in cash in case of an equity drop, or maybe drip the cash slowly back into equities?

Keeping £100ks in cash in my SIPP obviously has counter-party risk, albeit that it's unlikely AJ Bell will go tits.  I seem to remember some suggested Money Market investments, perhaps with Vanguard, that were a slightly better investment than straight cash, even after the management charges - can anyone remind me please?

Thanks as ever
V

You should not have bought VGOV if you cannot stomach the risk. Selling after a fall is not a good idea. Selling whenever investments fall and buying them when they rise is a sure way to get a poor return. If the market expectations of future interest rates falls, VGOV will rise in value. It will also most likely rise in value if the equity market crashes.

Vanguard's money market fund pays less than money in the bank, but may be safer if you have £millions invested. You could have used a bond fund with a shorter duration, or bought short dated gilts directly.

valiant24

GeoffTF said:

valiant24 said:

I've never previously invested in Gilts, but following advice here and elsewhere, about 9 months ago I rationalised my equity ETFs and Funds - I had about 70 of them! - down to basically VWRP and VGOV.

VGOV is killing me!   It's down 7% since the start of the year.  I can't foresee any circumstances in which it will ever stop dropping in the near of medium term, so I think I am going to bail.   This will be the second time in 9 months I have bailed from Gilts and it's cost me over £100k.

What's the alternative?  Just keep the money in cash in case of an equity drop, or maybe drip the cash slowly back into equities?

Keeping £100ks in cash in my SIPP obviously has counter-party risk, albeit that it's unlikely AJ Bell will go tits.  I seem to remember some suggested Money Market investments, perhaps with Vanguard, that were a slightly better investment than straight cash, even after the management charges - can anyone remind me please?

Thanks as ever
V

You should not have bought VGOV if you cannot stomach the risk.

I think perhaps I've taken foul of a different maxim: fully understand what you are investing in! 

VGOV seens to match my investment horizon per Lars Kroijer: apart from smallish lump sums for income for tax efficiency I expect my SIPP to be the last thing I touch for dosh: I plan to run down my unsheltered investments first so if all goes to plan it should be 8-10 years before I start taking significant sums from here.

VGOV seemed to be the best vehicle at the time.  

GeoffTF

valiant24 said:

GeoffTF said:

valiant24 said:

I've never previously invested in Gilts, but following advice here and elsewhere, about 9 months ago I rationalised my equity ETFs and Funds - I had about 70 of them! - down to basically VWRP and VGOV.

VGOV is killing me!   It's down 7% since the start of the year.  I can't foresee any circumstances in which it will ever stop dropping in the near of medium term, so I think I am going to bail.   This will be the second time in 9 months I have bailed from Gilts and it's cost me over £100k.

What's the alternative?  Just keep the money in cash in case of an equity drop, or maybe drip the cash slowly back into equities?

Keeping £100ks in cash in my SIPP obviously has counter-party risk, albeit that it's unlikely AJ Bell will go tits.  I seem to remember some suggested Money Market investments, perhaps with Vanguard, that were a slightly better investment than straight cash, even after the management charges - can anyone remind me please?

Thanks as ever
V

You should not have bought VGOV if you cannot stomach the risk.

I think perhaps I've taken foul of a different maxim: fully understand what you are investing in! 

VGOV seens to match my investment horizon per Lars Kroijer: apart from smallish lump sums for income for tax efficiency I expect my SIPP to be the last thing I touch for dosh: I plan to run down my unsheltered investments first so if all goes to plan it should be 8-10 years before I start taking significant sums from here.

VGOV seemed to be the best vehicle at the time.  

Here is the relevant video:

https://www.youtube.com/watch?v=TcGkFoWRDwk

If you may need the money in 8 years, a duration of 14 years is sticking your neck out. VAGP would be a better match, but too has taken a big hit recently. Nonetheless, you should expect a bumpy ride, as the video points out. Interest rates have fallen since the video was recorded, and (hopefully temporary) inflation is stoking up, but that should already be in the prices. The bond risks look scary, but the equity risks are worse.

aroominyork

UK gilts seem much more volatile than a global diversified fund, although of course you miss owning a chunk of linkers reflecting the UK economy. VGOV is green in the graph below. IGLH (yellow) is a developed world government bond fund. Blue is VAGP, mentioned by GeoffTF in the previous post, and red is its open-ended version; these two are aggregate bond funds so they include investment-grade corporate bonds as well as govt bonds.

Prism

aroominyork said:

UK gilts seem much more volatile than a global diversified fund, although of course you miss owning a chunk of linkers reflecting the UK economy. VGOV is green in the graph below. IGLH (yellow) is a developed world government bond fund. Blue is VAGP, mentioned by GeoffTF in the previous post, and red is its open-ended version; these two are aggregate bond funds so they include investment-grade corporate bonds as well as govt bonds.

I don't believe inidividual gilts are more volatile than other developed economy government bonds - why would they be? The difference in that graph is surely all down to the different duration of the funds.

GeoffTF

aroominyork said:

UK gilts seem much more volatile than a global diversified fund, although of course you miss owning a chunk of linkers reflecting the UK economy. VGOV is green in the graph below. IGLH (yellow) is a developed world government bond fund. Blue is VAGP, mentioned by GeoffTF in the previous post, and red is its open-ended version; these two are aggregate bond funds so they include investment-grade corporate bonds as well as govt bonds.

VGOV does not appear to contain any linkers. I hold Treasury IL 0.125% 2029. That is not listed under Holding Details. Indeed no 0.125% gilts are listed. (They are listed for Vanguard's inflation linked OEIC.) The Credit Quality is AA- for both VGOV and VAGP.

GeoffTF

Prism said:

aroominyork said:

UK gilts seem much more volatile than a global diversified fund, although of course you miss owning a chunk of linkers reflecting the UK economy. VGOV is green in the graph below. IGLH (yellow) is a developed world government bond fund. Blue is VAGP, mentioned by GeoffTF in the previous post, and red is its open-ended version; these two are aggregate bond funds so they include investment-grade corporate bonds as well as govt bonds.

I don't believe inidividual gilts are more volatile than other developed economy government bonds - why would they be? The difference in that graph is surely all down to the different duration of the funds.

They probably are not, but VAGP has a hugely more diversification than VGOV, which reduces the volatility.