Is VLS20 worth holding?

artyboy

TL;DR - does VLS20 still (ever?) provide a good balance of volatility and return?


So.... Little Miss Arty has VLS20 as an investment, was bought about 16 months ago when her cash JISA matured at 18.

Fair to say that I was not sold on the fund choice, but it was her money and her (and Mrs Arty's) reasoning was that she might be better starting investing with something that had lower volatility that pure equities, and returns that should aim to beat cash over 5-10 years. Bear in mind that when this was invested, markets were very different to today. 2% on a 5 year fix was about the best on offer...

Right now, her investment is about 13% down. She's not panicking or anything so no snap decisions will be made, but what I'm trying to understand is - is VLS20 (or similar pure/majority bond funds) still fit for purpose over the mid term? It may be less volatile than equities, but if the outlook is for markedly lower returns than cash, then it doesn't seem as though it makes sense to continue to hold.

Theres a whole subtext here about wanting to help daughter understand investing, and concern that this may have been a bad start, but that's for another day...

thanks
Arty

daveyjp

If that fund meets her risk appetite it is perfect for her.

artyboy

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

InvesterJones

Bonds behave as bonds behave - if you are looking for that behaviour then it makes sense to have a fund that has a large portion of bonds and VLS20 is an example of such.

I would guess your question is more about whether bonds are a suitable investment, rather than whether a specific fund of mostly bonds is worth holding?

Bonds come in various types, and their recent (often poor) performance is perfectly understandable, albeit frustrating if one has just made an assumption that bonds will always mitigate equities. Over the long term a basket of bonds will likely average to expected performance - but as with any investment there will be short term movements that are not in line with expected performance.

TL;DR: 16 months is too short a time to make any conclusion about return and volatility.

dunstonh

TL;DR - does VLS20 still (ever?) provide a good balance of volatility and return?

95% of the time it will perform in line with expectation. 5% of the time it will return outside of that expectation.

Right now, her investment is about 13% down. She's not panicking or anything so no snap decisions will be made

If she was tolerant of a 15% loss in 12 months then VLS60 would probably have been the better option.

but what I'm trying to understand is - is VLS20 (or similar pure/majority bond funds) still fit for purpose over the mid term?

It is barely fit for purpose in the first place.   Going 80% bonds and 20% equities is going too heavy into bonds and dilutes the benefit of diversification.    Realistically, circa 40% equities is probably closer to figure as a minimum.

It may be less volatile than equities, but if the outlook is for markedly lower returns than cash, then it doesn't seem as though it makes sense to continue to hold.

It is likely bonds will come back into play soon.  Yields are now higher and about 2/3rds of the credit crunch gains have now unwound.   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).  Soon could be next month.  It could be next year or the year after.   You cannot predict the time.  You just know the bottom will hit soon.

artyboy

Investorjones and dunstonh, thank you, that's helpful. I had tried to frame my original question carefully, because I know there can be a tendency to fall back on risk tolerance as being the overriding determinant of suitability - whereas what I was trying to work out was whether this fund (and indeed broader asset class) provided a good intersection of risk and reward for that tolerance.

I'm also aware that 16 months isn't enough time to make a measured assessment of performance - but coupled with a midterm outlook view on bonds (which I know is a broad term in itself, but here meaning the VLS20 constituents), it could give some insight whether she's optimally invested for her risk appetite. And dunstonh, with your comment on VLS60, it suggests that might not be the case. 

alibean121

I would say that, if a change is made, it's very important in terms of investing education to make clear that it would be being moved because of eg. risk profile, suitability etc. Not because the value has fallen. This is pretty much the route to disaster to see falls in value and use that as a prompt to reassess investments.

artyboy

alibean121 said:

I would say that, if a change is made, it's very important in terms of investing education to make clear that it would be being moved because of eg. risk profile, suitability etc. Not because the value has fallen. This is pretty much the route to disaster to see falls in value and use that as a prompt to reassess investments.

Nailed it! Yes, if I were to have a discussion with Little Miss and Mrs Arty, that's exactly how I'd want to frame it. So trying to understand if there are better funds / asset classes to invest in within the same broad risk appetite; based on current market outlook...

bostonerimus

artyboy said:

alibean121 said:

I would say that, if a change is made, it's very important in terms of investing education to make clear that it would be being moved because of eg. risk profile, suitability etc. Not because the value has fallen. This is pretty much the route to disaster to see falls in value and use that as a prompt to reassess investments.

Nailed it! Yes, if I were to have a discussion with Little Miss and Mrs Arty, that's exactly how I'd want to frame it. So trying to understand if there are better funds / asset classes to invest in within the same broad risk appetite; based on current market outlook...

Almost everyone needs bonds and VLS20 serves that function. "Better" is a world I avoid when it comes to funds and investing. VLS20 is a good start and as the owner appears to be young now is the time to start to build a personal financial structure by systematically adding savings and equities etc. So I would add something to savings each month until at least 6 months of cash spending is in the account and also buy equity biased funds, VLS60 or 80 etc, preferably inside an employer pension to get the tax break and the employer contribution. VLS20 is just fine, but it and most other investment funds are going to have a bumpy ride as we go into recession, but 10 years from now the probability is that it will have been a good move to buy through the recession.

Audaxer

artyboy said:

daveyjp said:

If that fund meets her risk appetite it is perfect for her.

But that wasn't the question - it may be positioned as a 'lower' risk investment, and yes that was what she wanted, but if the current market conditions plus short/mid term outlook is for poor returns for anything predominantly bond focused, then taking the risk level in isolation could lead to a false sense of security that it's the right investment.

This is more about trying to determine if the risk/reward balance makes it a good investment versus, say, putting it back into cash at 3.5%

What is the anticipated time frame of her investing? If she is investing for retirement then I would say VLS20 was overly cautious and she would be better changing it for maybe VLS60 or higher. If she hopes to use it within say the next 10 years for a house deposit, then a bit more difficult in my view, but I would probably keep holding the VLS20 hoping bonds recover in the next few years, rather than sell it and crystallising a loss to put it into cash savings. Just my opinion.

Albermarle

In the great scheme of things moving to VLS 40 ( or similar) would not be a dramatic move. She would only be selling out of a proportion of the current bondholding so not crystallising much of a loss. In any case equities are also down, so probably not crystallising any loss at all.
Just a small asset reallocation, which might be easier to sell.