Price vs. Total Return on bond funds

aroominyork

Objectives are threefold: to increase govt allocation to balance currently being overweight corporate; to reduce current focus on short duration; to veer on the cautious side (in fact Morningstar's fund allocation of 17% BBB, 13% BB, 8% unrated might make the fund a bit too junky for me) and not limit to the UK. Other decisions are for the manager to decide. I am looking at c.20% of my bond allocation being here, with the balance in CGT and the RL funds I hold (Short Duration Credit and Short Duration Global Index Linked). The RL index linked fund is a hedge against the impact on equities of higher than expected inflation; once that issue feels less unpredictable I expect I will sell it.

Bonds are damn difficult to understand so, for many people, I think VLS is a perfectly justifiable fire-and-forget choice. How would you suggest passive or less knowledgeable investors (even less knowledgeable than me!) select bonds?

(I wrote last night to Jupiter/Merian asking for the last five years' reports so I can get a flavour of how the fund has positioned itself over time.)

Linton

aroominyork said:

Objectives are threefold: to increase govt allocation to balance currently being overweight corporate; to reduce current focus on short duration; not limited to the UK and veering on the cautious side (in fact Morningstar's fund allocation of 17% BBB, 13% BB, 8% unrated might make the fund a bit too junky for me). Other decisions are for the manager to decide. I am looking at c.20% of my bond allocation being here, with the balance in CGT and the RL funds. The RL index-linked fund is a hedge against the impact on equities of higher than expected inflation; once that issue feels less unpredictable I expect I will sell it.

Bonds are damn difficult to understand so, for many people, I think VLS is a perfectly justifiable fire-and-forget choice. How would you suggest passive or less knowledgeable investors (even less knowledgeable than me!) select bonds?

(I wrote last night to Jupiter/Merian asking for the last five years' reports so I can get a flavour of how the fund has positioned itself over time.)

1) For objectives I was thinking of the reasons for you investing.  What do you want to get from your investments in terms of when do you want the money, how much growth do you need, how much volatility would frighten you etc.  The next question is how do you want the bond allocation to contribute to your meeting those objectives.

These are rhetorical questions, things I believe a serious investor should be able to answer.

2) I dont understand your intention to sell your IL bonds once the issue "feels less unpredictable".  The predictability of longterm  inflation surely has not changed in the past year and wont change in the future.   Investing on "feelings" is likely to end in  lower returns.

As has been stated before IL bond funds are for the long term.  The inflation linked pay-out occurs at maturity.  In the short term they can be highly volatile with no link to inflation as people are seeing now.  If you want some guarantee of protection against long term inflation then you need long term holdings of IL bonds with maturity dates that match your needs for the money. 

3) The latest fund documentation is available on the net from trustnet and morningstar.  The former only provides info for funds that subscribe to them.

4) Safe bonds are much simpler in concept than equity because everything is based on GCSE or A level mathematics.  But they  need a very different mindset.  Bond portfolios would need more ongoing management than equities to control the durations.

5) I think less knowledgable investors and many experienced investors should only buy bonds:
 - as part of a risk-targetted multi-asset fund with an appropriate risk level such as provided by HSBC
 - as part of a fund which happens to hold appropriate bonds to meet a specific objective.  Examples include wealth preservation and income funds.

My portfolio does not include any safe government bond funds.  My only bond funds are Jupiter Strategic, which forms part of the Wealth Preservation tranche, and corporate/EM bond funds for income.  Jupiter Strategic is likely to be replaced by WP funds at the next rebalance.

JohnWinder

aroominyork said:

1.15% is the old dirty class. The clean class charges 0.65%. However I agree even that eats deep into likely returns from a bond fund, especially with trading costs on top. My two Royal London bond funds (Short Duration Credit and Short Duration Global Index Linked) charge 0.35% and 0.27% respectively, which feels much more comfortable. 

And a note on a 4% front end fee: over a short term, this is a massive effective increase in annual fee, eg if you invested for only one year the annual fee would be increased by 4%. Over the longer term the 4% becomes more diluted, but after 20 years it's still equivalent to an extra 0.2%/year in fees.

Linton

JohnWinder said:

aroominyork said:

1.15% is the old dirty class. The clean class charges 0.65%. However I agree even that eats deep into likely returns from a bond fund, especially with trading costs on top. My two Royal London bond funds (Short Duration Credit and Short Duration Global Index Linked) charge 0.35% and 0.27% respectively, which feels much more comfortable. 

And a note on a 4% front end fee: over a short term, this is a massive effective increase in annual fee, eg if you invested for only one year the annual fee would be increased by 4%. Over the longer term the 4% becomes more diluted, but after 20 years it's still equivalent to an extra 0.2%/year in fees.

Generally platforms do not charge the front end fee, in particular HL do not charge it for the Merian fund. That is probably "never" rather than "generally not" as I have never met one.  Front end fees and the higher management fees generally only apply if you buy the fund directly from the fund manager.

aroominyork

Linton said:

My portfolio does not include any safe government bond funds.  My only bond funds are Jupiter Strategic, which forms part of the Wealth Preservation tranche, and corporate/EM bond funds for income.  Jupiter Strategic is likely to be replaced by WP funds at the next rebalance.

I also held Jupiter Strategic for a few years when I started DIYing, having read reviews that the manager was good at responding to the macro environment. After a while I saw no evidence of this so I sold. Maybe he got it right one or twice in the past and lived off the reputation, a little like M&G Optimal spent a decade or more living off their reputation of successfully navigating the GFC. I guess that should influence my thinking about the future merits of Merian fund!