Bonds/Gilts index funds? guidance needed

GazzaBloom

I am a low 100% equities index fund investor in my pension. I am comfortable with choosing equity index funds and being 100% in stocks in accumulation, but, over the next few years I want add some bonds to my portfolio to provide some counter to the volatility swings in retirement and ideally some inflation beating growth (although that is a secondary consideration). I may be looking at building up to an 80/20 or 70/30 mix over time by directing new contributions to a bonds fund. 

I like low fees and the following bonds/gilts funds are available inside my Aviva workplace pension at the lowest fees of 0.16% pa.

I have tried to understand bonds and kind of get it but apart from crudely looking at past performance, I'm not sure which of these funds would be most suitable for me, or should I buy a even mix of each? I get the difference between government bonds (Gilts) vs Corporate Bonds in terms of the risk being higher with private industry as Governments tend to be more likely to pay back (unless you have bonds with Russian Government currently!)

Is there a Bonds Index Funds for Dummies book available?  Which of these, if any would you buy to compliments a stocks index fund?

• Av MyM BlackRock All Stocks UK Gilt Index Tracker
• Av MyM BlackRock Corporate Bond All Stocks Index Tracker
• Av MyM BlackRock Over 15 Year Corporate Bond Index Tracker
• Av MyM BlackRock Over 15 Year Gilt Index Tracker
• Av MyM BlackRock Over 5 Year Index-Linked Gilt Index Tracker
• Av MyM BlackRock Overseas Bond Index Tracker

Any thoughts or suggestions would be appreciated.

Marcon

GazzaBloom said:

I am a low 100% equities index fund investor in my pension. I am comfortable with choosing equity index funds and being 100% in stocks in accumulation, but, over the next few years I want add some bonds to my portfolio to provide some counter to the volatility swings in retirement and ideally some inflation beating growth (although that is a secondary consideration). I may be looking at building up to an 80/20 or 70/30 mix over time by directing new contributions to a bonds fund. 

I like low fees and the following bonds/gilts funds are available inside my Aviva workplace pension at the lowest fees of 0.16% pa.

I have tried to understand bonds and kind of get it but apart from crudely looking at past performance, I'm not sure which of these funds would be most suitable for me, or should I buy a even mix of each? I get the difference between government bonds (Gilts) vs Corporate Bonds in terms of the risk being higher with private industry as Governments tend to be more likely to pay back (unless you have bonds with Russian Government currently!)

Is there a Bonds Index Funds for Dummies book available?  Which of these, if any would you buy to compliments a stocks index fund?

• Av MyM BlackRock All Stocks UK Gilt Index Tracker
• Av MyM BlackRock Corporate Bond All Stocks Index Tracker
• Av MyM BlackRock Over 15 Year Corporate Bond Index Tracker
• Av MyM BlackRock Over 15 Year Gilt Index Tracker
• Av MyM BlackRock Over 5 Year Index-Linked Gilt Index Tracker
• Av MyM BlackRock Overseas Bond Index Tracker

Any thoughts or suggestions would be appreciated.

Have you read the fund factsheets on Aviva's website, or just googled on their names which gets you masses of info e.g. https://www.trustnet.com/factsheets/p/k1mt/av-mym-blackrock-all-stocks-uk-gilt-index-aquila-c-pn

Without knowing what you are trying to achieve in terms of balancing risk against possible return, it's impossible to suggest which might suit you.

GazzaBloom

Marcon said:

GazzaBloom said:

I am a low 100% equities index fund investor in my pension. I am comfortable with choosing equity index funds and being 100% in stocks in accumulation, but, over the next few years I want add some bonds to my portfolio to provide some counter to the volatility swings in retirement and ideally some inflation beating growth (although that is a secondary consideration). I may be looking at building up to an 80/20 or 70/30 mix over time by directing new contributions to a bonds fund. 

I like low fees and the following bonds/gilts funds are available inside my Aviva workplace pension at the lowest fees of 0.16% pa.

I have tried to understand bonds and kind of get it but apart from crudely looking at past performance, I'm not sure which of these funds would be most suitable for me, or should I buy a even mix of each? I get the difference between government bonds (Gilts) vs Corporate Bonds in terms of the risk being higher with private industry as Governments tend to be more likely to pay back (unless you have bonds with Russian Government currently!)

Is there a Bonds Index Funds for Dummies book available?  Which of these, if any would you buy to compliments a stocks index fund?

• Av MyM BlackRock All Stocks UK Gilt Index Tracker
• Av MyM BlackRock Corporate Bond All Stocks Index Tracker
• Av MyM BlackRock Over 15 Year Corporate Bond Index Tracker
• Av MyM BlackRock Over 15 Year Gilt Index Tracker
• Av MyM BlackRock Over 5 Year Index-Linked Gilt Index Tracker
• Av MyM BlackRock Overseas Bond Index Tracker

Any thoughts or suggestions would be appreciated.

Have you read the fund factsheets on Aviva's website, or just googled on their names which gets you masses of info e.g. https://www.trustnet.com/factsheets/p/k1mt/av-mym-blackrock-all-stocks-uk-gilt-index-aquila-c-pn

Without knowing what you are trying to achieve in terms of balancing risk against possible return, it's impossible to suggest which might suit you.

Ideally, I want the bonds to be much lower volatility than the stocks fund, but match inflation as a minimum as a typical annualised average return, if that can't be achieved I may as well hold cash in the short term over say 2-3 years.

squirrelpie

GazzaBloom said:

Ideally, I want the bonds to be much lower volatility than the stocks fund, but match inflation as a minimum as a typical annualised average return, if that can't be achieved I may as well hold cash in the short term over say 2-3 years.

The prices of bonds are determined very largely by their yields (i.e effective interest rates). Given that interest rates have been very low for quite a while, bond prices are high and are likely to decrease now as interest rates are raised and as inflation increases. So whilst the interest they pay may move the same way as inflation, their capital value will move the opposite way. So whether they are useful to you at the moment depends on whether you look at them entirely as a source of income or whether you see them as part of your capital value.

gm0

"cash in the short term over 2-3 years". 

You have part of your answer already.  If the capital not the yield from the "will it be cash or bonds" portion is needed to support short term income then it is unlikely to be sensible to invest it in bond funds or much else.  Classically this short term income element was often TIPS (in the US) or "index linked gilts or linkers in UK speak - safest category, inflation linked, individual bonds to be held to term - spitting out the required cash flow via the interest coupon and then the capital redemption - a bond ladder approach - duration 1,2,3 etc.  Using a "cash like" but inflation protected minimal risk asset type.  Not an application for corporate bonds or "high yield" aka Junk which carries credit and other risks.

But two problems today with rates and QE.   One - you very likely lock in a loss and negative yield to buy them at current interest rates and prices.  Problem two from the question as asked - actual bonds to be held to term don't care about interest rates but funds of bonds do.

Funds have an average duration (number of years of coupons) for the mix of geography, type and credit grade in the fund and they roll this over so unlike the bond ladder of actual bonds you are exposed to interest rate risk i.e. capital loss when interest rates rise and your lower rate bonds are less attractive.  There is a good monevator summary article on this general subject.  The longer the duration of the bonds in the fund the more sensitive to interest rate change it is.

So any cash you need soon is cash (and gets an inflation hit).   Investible assets which can stay invested can use fixed interest alongside equity for diversification to the level you like - just be aware of the cycle we are in on bond prices and interest rates and also the risk that the -ve correlation with equities doesn't always turn up in all conditions.

Just cash is no good in a lengthy inflation spike for longer term holdings so you have to pick a mix of risk asset categories to suit you.  Clearly if you view them as lower risk, lower volatility then going heavy on emerging markets, lower credit grade corporates with a high coupon isn't going to deliver that quiet life.  Better quality corporates and gilts perhaps a better choice.  But yields will be terrible just now.

Better to start with the purpose and investment statement for that chunk of the portfolio and that will filter out a number of choices based on whether it is providing balance to equities, or is a proxy/substitute for short term cash holdings supporting income.

JohnWinder

A very large part of the risk you take and the return you'd anticipate with 80/20 is in the stock part of the portfolio, so whether it's bond fund X or Y likely won't make much difference.

I doubt you'll find a book on bond funds, but it's not hard to search for books these days with a bit of initiative. There are several well recognised bond books which deal with funds also: Thau wrote one; Swedroe another.

Credit risk, interest rate risk and inflation risk are bond worries. If you're trying to reduce those risks: choose high quality bonds and diversify; choose shorter term bonds which changing interest rates won't buffet around so much; choose inflation linked bonds. Each step you take to reduce risk will likely cost you in terms of return, except for diversification.

counter to the volatility swings in retirement and ideally some inflation beating growth

We all want the best growth don't we? But let's be realistic. Bonds are promises to repay what was borrowed; there is no growth. The only 'growth' you can have with a bond is what comes in regular coupon payments - and we know how low interest rates and bond yields are now; unless interest rates fall thus giving existing bonds more appeal to buyers, in which case you can have some growth. I suppose the other growth potential is with inflation linked bonds which increase in value with inflation, so it's not real growth, it's nominal growth.  Bond funds are the same.
If you're trying to counter portfolio volatility then you need safe bonds, and those don't return much. Don't hope for anything special.

GazzaBloom

gm0 said:

"cash in the short term over 2-3 years". 

You have part of your answer already.  If the capital not the yield from the "will it be cash or bonds" portion is needed to support short term income then it is unlikely to be sensible to invest it in bond funds or much else.  Classically this short term income element was often TIPS (in the US) or "index linked gilts or linkers in UK speak - safest category, inflation linked, individual bonds to be held to term - spitting out the required cash flow via the interest coupon and then the capital redemption - a bond ladder approach - duration 1,2,3 etc.  Using a "cash like" but inflation protected minimal risk asset type.  Not an application for corporate bonds or "high yield" aka Junk which carries credit and other risks.

But two problems today with rates and QE.   One - you very likely lock in a loss and negative yield to buy them at current interest rates and prices.  Problem two from the question as asked - actual bonds to be held to term don't care about interest rates but funds of bonds do.

Funds have an average duration (number of years of coupons) for the mix of geography, type and credit grade in the fund and they roll this over so unlike the bond ladder of actual bonds you are exposed to interest rate risk i.e. capital loss when interest rates rise and your lower rate bonds are less attractive.  There is a good monevator summary article on this general subject.  The longer the duration of the bonds in the fund the more sensitive to interest rate change it is.

So any cash you need soon is cash (and gets an inflation hit).   Investible assets which can stay invested can use fixed interest alongside equity for diversification to the level you like - just be aware of the cycle we are in on bond prices and interest rates and also the risk that the -ve correlation with equities doesn't always turn up in all conditions.

Just cash is no good in a lengthy inflation spike for longer term holdings so you have to pick a mix of risk asset categories to suit you.  Clearly if you view them as lower risk, lower volatility then going heavy on emerging markets, lower credit grade corporates with a high coupon isn't going to deliver that quiet life.  Better quality corporates and gilts perhaps a better choice.  But yields will be terrible just now.

Better to start with the purpose and investment statement for that chunk of the portfolio and that will filter out a number of choices based on whether it is providing balance to equities, or is a proxy/substitute for short term cash holdings supporting income.

Hi gm0 I think you may have misunderstand my point regarding 2-3 years. I don't mean in drawdown, I mean over the next 2-3 years of accumulation. Is it a good time to buy into bonds over next 2-3 years or should I simply shovel contributions into cash alongside the equities portfolio and consider buying bonds down the road once interest rates stabilize (if there ever is such a time)? Towards the end of this year I expect to have enough accumulated equity units for my retirement plans so then will be focusing on building up other assets i.e. cash/bonds.

What I'm getting from the replies above is that short duration bonds are better with inflation rising and index linked gilts are safer. So the Av MyM BlackRock Over 5 Year Index-Linked Gilt Index Tracker sounds a reasonable fund to buy for the bonds.

coastline

Some decent reading on bonds here.

The best Vanguard bond funds for UK investors - Occam Investing

Home (occaminvesting.co.uk)

Not an expert but this is what I've looked at recently. The 10 year US bond yield is now over 2% so if you stretch the chart out to 25 years or more you can see it's kind of forming a base over the last 10 years from 2012. There's a big drop in yield during the pandemic but would that have happened in general ? Again worth noting there's always some volatility even in the short term .

United States Government Bond 10Y - 2022 Data - 1912-2021 Historical - 2023 Forecast (tradingeconomics.com)

You can do the same with the UK bond and see there's a drop during brexit and the pandemic but still around that 2012 region today.

United Kingdom Government Bond 10Y - 2022 Data - 1980-2021 Historical - 2023 Forecast (tradingeconomics.com)

The market is anticipating seven rate increases this year of 0.25%. Bond markets have priced much of this in hence the 2% yield on the US 10 year. What happens with inflation is the question and will the central banks keep chasing it with rate rises. ? They'll not want a recession if they push too fast so the activity could well stop in 2023 ? Tricky balancing act. ? Again the bond market will react and yield could well fall a bit in the near future so a quick capital gain for bond fund investors ? 

FN9auQdX0AIGwZn (900×593) (twimg.com)

You can see performance of bond funds hasn't been too good as those yields rise in the last two years. Maybe not too bad against inflation but we don't know what happens next.?

Chart Tool | Trustnet

Just to illustrate this 2012-2022 view you can set the VGOV chart to 10 years and see the price isn't that much different . Income won't be included on the chart ?

Vanguard U.K. Gilt UCITS ETF summary price and performance data – Investors Chronicle

GazzaBloom

^^ Thanks @coastline