Is VLS20 worth holding?

masonic

artyboy said:

aroominyork said:

dunstonh said:

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   Another 5-10% loss and it will be back to early 2000s levels (assuming income withdrawn).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.

Even though yields on new issues are higher, won't it take some years until the bonds within an intermediate duration index bond fund start reflecting the new issues more than the old issues that make up most of the holdings? So won't those funds keep distributing less than 2-3% for a few years more?

And this is (I think) the crux of my question - the conventional wisdom with investments is not to bail when the market turns against you, and instead take the long view. But if there is a more than realistic prospect that bonds (and more specifically those held within VLS20) are going to underperform in the mid term - even relative to cash - does bailing for an alternative fund actually make sense... on the balance of probabilities...?

Yes it would make sense if you'd done so towards the end of last year when the risk of rate rises became clear and there was virtually no chance they'd continue to be held at historic lows. Most of the damage is done now and the market has priced in current expectations (1 year Treasury yield above 4%, 1 year Gilt not far behind). The depth of the impending/current recession is going to limit how much further rates can be hiked. My guess would be that you're almost equally likely to generate the best return from VLS20 vs cash over the medium term at current prices. Before too much longer the balance of probabilities will favour VLS20. If the recession really starts to bite down, with bonds now yielding reasonable amounts, one might expect them to once again start rising in value when equities fall.

B0bbyEwing

dunstonh said:

Going 80% bonds and 20% equities is going to heavy into bonds 

Be careful. That's almost advice

aroominyork

But, masonic, your answer does not address the low, <2%, yield on bond funds since they are still full of low coupon holdings. Why hold them when you can instead get 3.5%-4% on individual bonds? After all, a baked-in loss is dead money.

masonic

aroominyork said:

But, masonic, your answer does not address the low, <2%, yield on bond funds since they are still full of low coupon holdings. Why hold them when you can instead get 3.5%-4% on individual bonds? After all, a baked-in loss is dead money.

The yield is the amount expected to be distributed over the next 12 months. You've recently purchased a short-dated individual gilt. Very little of your total return from that investment will be in the form of distributions. Take the largest holding of VLS20, Vanguard Global Bond Index Fund GBP Hedged, it has a yield of 1.66%, but an effective YTM of 4.1%. It may be that an appreciable number of bonds it holds are trading below par and are set to appreciate in price as time goes by. As it is a fund of funds, the income VLS20 received is going to be determined by the distribution schedule of the underlying funds, which could cause an anomalous result. It would need an in depth analysis of the VLS20 constituents and their holdings to get a full understanding of why the quoted yield is well below the yield of the asset class and YTM of the underlying bond funds.

aroominyork

Since a bond fund never matures (unless it has a target date that reduces duration as time passes, and I'm not sure that exists) is YTM of a bond fund the average annual expected return during the duration period of the fund, eg 8-9 years for Vanguard Global Bond Index?

adindas

artyboy said:

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

Not worthy in my personal opinion. My personal bond holding = 0. It has always been like that from the beginning.

Not many of proven billionaires investors ever recommend people to hold bond especially for a long time holding. Let alone 80% to be had in Bond. That expert views have been there for many years. If these billionaires investor are having Bonds, that is only for a short, not for long term for different purpose as a cash alike instrument rather them sitting idle. Not as investment vehicles. They definitely can not do like most of retailer investors could such as put it in high Interest instant access, easy access saving accounts, Regular saving accounts without incurring any taxes.

Some people are holding bonds just following the crowd without looking into their own circumstances whether it is a suitable investment strategy or vehicles for themselves. I remember how popular Vanguards life-strategy 60/40 about ten years ago was.

There are a lot of saving account RSA serve a better purpose than and and could be deployed to equity anytime you want to.

For instance I just saw it today like this pay 3.48% fixed min £1k, or 3.60% with for higher investment for one year FSCS protected (have not really scrutinised it). Other members please provide warning of any read flags.

https://www.oxbury.com/product-summary-personal-1-year-bond-bap0511

A few  RSA are paying 5% interest.

But it is certainly it is worse to sell investment at a loss when they have a potential to reach a break-even in the future. But when it reaches a break-even reconsider your investment strategy.

masonic

aroominyork said:

Since a bond fund never matures (unless it has a target date that reduces duration as time passes, and I'm not sure that exists) is YTM of a bond fund the average annual expected return during the duration period of the fund, eg 8-9 years for Vanguard Global Bond Index?

When you buy the fund, you lock in the YTM at the time you buy, but as the fund turns over holdings, then any of these that have a duration shorter than your holding period introduce interest rate risk and an unpredictable element to your returns. While your holding period > duration of fund then your return will approximate to average YTM over this period. At the point you sell, you give up your future income stream and accept the market's view on what that income stream is worth at that moment in time. This can create a significant 'adjustment' to those final years' returns (as those selling now will find).

aroominyork

Given that the fund never matures do you have two options, 1) hold it forever and receive the distributions, currently <2% and slowly increasing as new issues replace old ones, or 2) sell it at some stage and crystallise the market's view of the fund's worth? 

If you sell after holding for the fund's duration, say 8 years, are you saying that returns will be lower than YTM in the early years and higher than YTM in later years, averaging out over the period (seeing aside the market's revaluation of the fund)?

JohnWinder

I’m claiming ineptitude on this question, so some observations only.
Be careful with ‘expected’ returns, as it means something like arithmetic average or ‘most likely’ in more formal writing, but casually folk take it to mean ‘what I can expect to get’. That latter can be misleading when the eventual return finishes up being something in the distribution of possible returns, but well away from the ‘most likely’. If I buy a bond maturing in 10 years and yielding 1%/year now, to sell in one year, my expected return (I’m guessing now) should be 1%; but we all know that a big interest rate change 10 months from now can markedly alter my return. If so, trying to anticipate the yield you obtain in one year would be so prone to failure as to make it a waste of time. I can’t see why a bond fund with 10 year duration would be any different, but maybe it is.

masonic

aroominyork said:

Given that the fund never matures do you have two options, 1) hold it forever and receive the distributions, currently <2% and slowly increasing as new issues replace old ones, or 2) sell it at some stage and crystallise the market's view of the fund's worth?

There are more options than that. For example, you could gradually draw down the investment over a long period of time, in which case the sequence of returns risk would tend to even out. Alternatively, you could 'lifestyle' from a longer duration fund into a short duration fund (perhaps not what someone holding a multi-asset fund like VLS20 would have in mind).

aroominyork said:

If you sell after holding for the fund's duration, say 8 years, are you saying that returns will be lower than YTM in the early years and higher than YTM in later years, averaging out over the period (seeing aside the market's revaluation of the fund)?

It's impossible to say if returns would be higher or lower at any point in time. If you hold for the duration, then you get the starting YTM, plus the returns equivalent to making a regular investment into new issues and selling those at market price prior to maturity. The trading of those newly issued bonds could have a positive or negative effect on the overall return. You also cannot predict what will happen to the price of the bonds you started with on a day to day basis until they near maturity, so returns in any year could be above or below the starting YTM and overall average return.

If you want a known return, then individual bond holdings are the way to go.