Is VLS20 worth holding?

masonic

adindas said:

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.

Not many of proven billionaires investors ever recommend people to hold bond. Let alone 80% to be had in Bond. That expert views have been there for many years. I think many people are holding bonds just following the crowd without looking into their own circumstance whether it is a suitable investment strategy or vehicles for themselves.

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 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.

There are clearly periods where bonds returns have completely wiped the floor with consumer savings accounts. When bonds are working as a negatively correlated asset class to equities (i.e most of history other than the last 6-12 months), then an individual would need a lower percentage bonds in their portfolio than cash to achieve an equivalent reduction in volatility. More equities translates to higher returns over the long term, and a small differential in interest paid out by bonds vs savings is unlikely to be material. You are going to struggle to achieve the rates on offer from fixed term savings accounts within your pension, and would need to take quite a hit if using a cash ISA. Compare that with a near 4% return guaranteed by holding a 1 year gilt to maturity.

It is always worth weighing up your options though.

Billionaires are quite right to shun low return low risk assets like bonds. Going 100% equities is the way to maximise long term returns. However, those of more modest means are inclined to take greater care with their assets, often being unreasonably cautious. But even that is better than investing above one's risk tolerance and crystallising heavy losses when a crash comes along out of fear.

JohnWinder

If you hold (the bond fund) 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.

I would think the return (if you sell after holding for the fund's 8 year duration) could be quite different again. I'll accept that it could be as described up to 2 months before you sell, then the central banks raise interest rates twice, a month apart, by 0.75%/year, and as we can see from the bank of England bond yield curves the yield on bonds covering a wide range of maturities can change by 2%/year. So in that final 2 months before you sell the price might further change by 2%x8. That's a big change despite spreading it over the 8 years you've held the fund for. Is there any point trying to predict bond fund returns any more than equity fund returns except that there's usually less volatility?

masonic

JohnWinder said:

If you hold (the bond fund) 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.

I would think the return (if you sell after holding for the fund's 8 year duration) could be quite different again. I'll accept that it could be as described up to 2 months before you sell, then the central banks raise interest rates twice, a month apart, by 0.75%/year, and as we can see from the bank of England bond yield curves the yield on bonds covering a wide range of maturities can change by 2%/year. So in that final 2 months before you sell the price might further change by 2%x8. That's a big change despite spreading it over the 8 years you've held the fund for. Is there any point trying to predict bond fund returns any more than equity fund returns except that there's usually less volatility?

Yes, absolutely. That's what I mean by "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." Rate changes aren't going to have any effect on the returns you achieve from the underlying bonds you owned upon buying the fund. Most of those will have matured, and the remainder will be so short-dated as not to be materially affected. Both components of the return have near equal weighting if you only hold for the duration of the fund. As you hold for longer, the outcome tends towards the average YTM and away from the market price return.

Just look at what would have happened to someone buying Vanguard Global Bond Index Hedged 8 years ago and selling it today - they'd make an overall return of 4% (0.5% annualised), which is going to be less than the YTM at the time they bought, which was probably in the region of 1.5%.

As far as trying to make predictions is concerned, the last 6-12 months has been a rare occasion where there was plenty of forewarning about where interest rates were heading. This gave bond investors a rare opportunity to avoid a predictable negative period. Starting from where we are now, it is much more difficult to predict the direction of interest rates over 6 or 12 months, though every indication is pointing to further rises over the remainder of this year. We could see falling interest rates in 2023.

adindas

JohnWinder said:

If you hold (the bond fund) 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.

r. Is there any point trying to predict bond fund returns any more than equity fund returns except that there's usually less volatility?

There is no need to predict. In the long run, Equity beats bond is a general truth. That is the reason why billionaires investors, acute fund managers (not pension managers) never consider Bonds as a good investment.

In the bear market they should work to sooth the volatility in fact they do not do what they should be doing.

If these billionaires investor are having Bonds, that is only for a short, not for long term and serve as a different purpose e.g as a cash alike instrument rather them sitting idle. Not as an investment vehicles.