Bonds

tebbins

Why do you say "rescued"? Almost all portfolios have fallen this year. If you needed any of this money in a timescale of months to years (earlier you indicated this was all to be invested for 10+ years?) it probably should not have been invested. What is this money needed for?

JohnnyB70

ChainsawCharlie said:

Its just I keep reading about how bonds are going to under perform  and concerned I will seriously lose my pension pot  or do bonds eventually recover?

JohnnyB70 said:

What are your concerns?

If you own a government bond and hold it to maturity you already know exactly what you will receive,,and when.

JohnWinder

Janus H has several bond funds so we don’t know which is yours, so commentary is difficult, but we can talk about if it’s a bad time for bonds.

Imagine you have money you don’t need to use for 5 or 10 years (let’s say 10 yrs), you could lend it by buying one bond (or many of the same one) that was due to be repaid in, let’s say 7 or 8 years time and will pay regular interest of a fixed, guaranteed amount. Right from the start, and all the way to maturity, you know how much interest you’ll get, and that all you lent will be returned (if there’s no default). 

During those 8 years you could buy more of those bonds (with the same guaranteed interest rate) but if lending/borrowing interest rates had risen since you bought, then the bond would now be cheaper to buy (thus providing a higher yield as a result of rising interest rates). But your original bonds haven’t changed at all, since they are a contract; you still get the interest you were guaranteed, and your principal returned. Despite bonds prices falling across the board (and the planet) as interest rates rose, nothing has changed for you. The sky is not falling in on bonds now.

Bond funds work the same way. The fund that costs £40 to buy will drop in price if interest rates rise because that £40 could now buy bonds paying a higher interest rate, but the fund will still deliver to you just what it promised if the manager holds the bonds to maturity. Your ‘loss’ if interest rates fall is the lost opportunity to have bought the fund cheaper, which is the same as buying stocks which costs you the opportunity to buy them cheaper if prices fall. That makes it very tempting for people to try to guess interest rate changes coming along, but that’s as hard as predicting stock price movements. 

So if your 8 year bonds drop in price because interest rates rise you should be rejoicing because with the coupons they pay you can now buy more bonds which are paying a higher interest rate; a perfect scenario as higher interest rates are always better than lower ones for lenders. And similarly for your bond fund. THE problem arises if you have to sell your bond before it matures, it being worth less than it would at maturity, if interest rates have risen. Same deal for the bond fund. This points to a fundamental issue to consider when buying bonds/funds: does their time to maturity match, at least roughly, how long you want to hold them for? Because you’d prefer not to be needing to sell them while interest rates are rising (and their value falling).

Commonly, but not right now in some countries, longer maturing bonds pay higher interest than shorter ones; as you’d expect, people want more interest to lend for longer times. So, commonly, longer maturing bonds are better, but not so long that you need to sell them before they mature. The problem with a bond fund is that it never matures; maturing bonds keep getting replaced by similar maturity bonds. So, imagining you have money you don’t need for 10 years, you buy a bond fund maturing in 8 years - well and good; but after 5 years you need your money in another 5 years but the bond fund is still ‘maturing’ in 8 years time - so there’s a potential problem if interest rates rise.  A solution is to hold 2 bond funds, one long maturing and one short maturing; and you progressively vary their proportions as your bond investments according to how much closer you are to needing the money. The maths is very simple proportioning, and it doesn’t need great precision.

Let us know next time your financial adviser explains that’s why they’re choosing your bond funds. We don’t know what your bond funds are, and I don’t want/need to, but the choices made for you look to be more than needed, and more expensive by ~1%/year than necessary; I’d be asking were they chosen to make the task look more difficult than it is to ward off anyone thinking they can diy this, or is there some compelling case in merit that these funds are needed.

That deals with interest rate risk for bond funds: buy 2, and hold in varying proportions. The other way to deal with it is to anticipate interest rate moves, and jump in and out of the market. That’s so hard, expensive with trading costs (one of the Janus H funds charge 4% entry fee!!) as to be a bad choice. Even the experts can’t do that reliably:  https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21

The other risk with bonds is credit risk. If that’s your concern, and it should be, only hold investment grade bonds or even only government bonds.

You mention inflation which is a concern for ‘bonds’, actually ‘nominal bonds’, for which you lend £100 and get £100 back, but inflation has turned that into £80. A solution is inflation linked bonds, so ask you advisor how much of your bonds are inflation linked.

ColdIron

JohnnyB70 said:

ChainsawCharlie said:

Its just I keep reading about how bonds are going to under perform  and concerned I will seriously lose my pension pot  or do bonds eventually recover?

JohnnyB70 said:

What are your concerns?

If you own a government bond and hold it to maturity you already know exactly what you will receive,,and when.

Except that most people, the OP included, invest in bond funds or other collective instruments

Albermarle

Total portfolio cost £107,,000 approx £19,000 in bonds as above, with some of my other equity funds with small bond allocations too.After reading about Bonds of late, I'm concerned at the amount of my portfolio which is invested in Bonds, I plan to keep this portfolio untouched and invested for at least 10 years, should I be worried?Its just I keep hearing about how Bonds are not the way forward anymore, or is this just a temporary situation, given the inflation at present?

Have you checked how the bond funds you hold have actually performed in the last 6 months ? Probably not very well, and maybe they have lost most of the value they are going to lose already.

As previously mentioned , despite the grey outlook for bonds , it is probably still a good idea to have some , but probably a lower % than was often the case . I think you said about 20% , which is maybe in the right ball park.

masonic

The funds you have listed are all invested predominantly in corporate bonds, so you have added default risk but generally higher yield and shorter duration, which makes them less sensitive to interest rate rises, but more correlated with equities. Your adviser seems to have avoided government bonds, which is probably a good thing, but has also avoided inflation linked bonds, which have been more appropriate for the unfolding circumstances (I'm excluding the bonds included in VLS60 from this - depending on how much of that you hold, the full portfolio could look quite different).

Needless to say, investing money in any of those funds with a <2 year horizon was not a good move. If you were clear about the drawdown plans, and the drawdown amounts could not be covered by income, it seems the adviser has made a mistake, and your intervention was sensible.

aroominyork

On the subject raised by masonic of inflation linked bonds, it is worth mentioning duration. I recently bought a short duration inflation linked fund (the blue one on the chart below), holding bonds that mature in an average of five years. This is less volatile than longer-term bonds and will be more responsive to inflationary forecasts/pressures in the short/medium term. My rationale is that if inflation is higher than already priced in, there could be recessionary pressures which will hit equities; this fund provides a hedge as its price would then rise. If inflation is transitory, this fund might fall in value but my equities will do better.

Just for info, I recently sold Vanguard global bond index fund because those high quality bonds (60% govt, 40% corporate) are the ones doing worst at the moment. My main bond holding is Royal London Short Duration Credit; they are generally BBB grade so I have the prospect of better coupons. I also have some longer term inflation linked bonds in CG Absolute Return (the open ended version of Capital Gearing Trust).

curious_squirrel

aroominyork said:

Just for info, I recently sold Vanguard global bond index fund because those high quality bonds (60% govt, 40% corporate) are the ones doing worst at the moment. My main bond holding is Royal London Short Duration Credit; they are generally BBB grade so I have the prospect of better coupons. I also have some longer term inflation linked bonds in CG Absolute Return (the open ended version of Capital Gearing Trust).

Did you sell the Vanguard Global Bond fund at a loss? I have a chunk of that in my Pension and unsure what to do. The Vanguard Lifestrategy funds still have it I think, but I don't know if that's a comfort or not... (Had I not bought my bonds and equities separately I would have gone for Lifestrategy 60 or 80.)

aroominyork

curious_squirrel said:

aroominyork said:

Just for info, I recently sold Vanguard global bond index fund because those high quality bonds (60% govt, 40% corporate) are the ones doing worst at the moment. My main bond holding is Royal London Short Duration Credit; they are generally BBB grade so I have the prospect of better coupons. I also have some longer term inflation linked bonds in CG Absolute Return (the open ended version of Capital Gearing Trust).

Did you sell the Vanguard Global Bond fund at a loss? I have a chunk of that in my Pension and unsure what to do. The Vanguard Lifestrategy funds still have it I think, but I don't know if that's a comfort or not... (Had I not bought my bonds and equities separately I would have gone for Lifestrategy 60 or 80.)

I sold it about six weeks ago for less than I bought it in early/mid 2021 but, as ever, the question is whether you would buy it today - not what you paid for it. The bonds in VLS will be similar quality but overweight to the UK.

This is a difficult time for professionals/IFAs deciding where to invest non-equity monies, hence the articles popping up all over the place about whether the 60/40 split is dead. (Spoiler alert: it's not.)

JohnWinder

So, to unpick that in a simplistic way that ignores the rest of the portfolio which that was part of, as well as any benefits from selling:
If that bond fund was a good buy one year ago, it ought to be viewed as a better buy today since it can be bought at a cheaper price. As well, selling (without even buying a replacement) can come with frictional losses like buy/sell spreads, broker fees, but not taxes in this case.