Investing in different bond funds

Anx

My investments are 100% equity (single world tracker). They are approaching £70k (which is a large amount for me).
I would like to add some bonds for diversification - looking to have 10 to 15% in bonds

I have decided to opt for a
Gilt fund long duration: 40%

international government bond fund: 40%

Corp bond fund duration <10 years: 20%

from my equity portion I will have

I hope as rates go down my bond funds will go up in value. I will be adding a set amount each week rather than switching over straight away

please let me know your thoughts

Anx

I was thinking of buying the vanguard global bond fund but I think gilts will offer a better return 

JohnWinder

Parsimony in punctuating, I love it, but can one take it too far?

‘I hope as rates go down my bond funds will go up in value. I will be adding a set amount each week rather than switching over straight away’

Yes, but go down when? Wouldn’t you hope rates go up in the coming years, so that as bond prices fall you buy them more cheaply, and higher rates in the future mean higher returns from your bonds in the distant future?

For 30 years till recently UK inflation has been close to the ‘2s’, 2%/year. Such low rate and consistency has little adverse impact on nominal bonds. Has it clouded our thinking about bonds? We’re now getting about 10%/year inflation; if that keeps up it can rip the value out of nominal bonds, particularly long duration bonds. Investors in some countries weep because they don’t have linkers available to them.

masonic

Looking at the current yield curves ( https://www.bankofengland.co.uk/statistics/yield-curves ), long duration gilts don't look particularly attractive, unless you think interest rates will fall further than the market has already priced in?

Anx

Don’t have a clause what that means. Won’t long duration bonds increase the most when rates fall?

masonic

Anx said:

Don’t have a clause what that means. Won’t long duration bonds increase the most when rates fall?

It depends. I recommend some further research before buying a long duration gilt fund.

Anx

This shows my lack of knowledge. I think a multi asset fund based around risk would be best for me

Tondrive

Personally i think passive trackers are good for equities but i am not convinced the same applies to bonds.
They may need a more active approach and there are plenty of Funds and Investment Trusts where fees are not much greater than a tracker.

Linton

Tondrive said:

Personally i think passive trackers are good for equities but i am not convinced the same applies to bonds.
They may need a more active approach and there are plenty of Funds and Investment Trusts where fees are not much greater than a tracker.

I agree with this.  In my view when buying bonds you need to have a fairly precise idea of why you are buying them and then choose those bonds which match your objectives.  ISTM with long dated bond funds you are in danger of increasing volatility without sufficiently increasing returns.

At the moment I can see some advantage in buying index linked bonds with maturity dates matching your investment timeframe.  I cant see any point in buying a fund of miscellaneous long dated gilts.

GeoffTF

Anx said:

I was thinking of buying the vanguard global bond fund but I think gilts will offer a better return 

The effective yield to maturity for the Vanguard fund is 3.8%, with an average maturity of 8.9 years:

https://www.vanguard.co.uk/professional/product/fund/bond/9142/global-bond-index-fund-gbp-hedged-acc

Gilts of the same maturity are yielding 3.7%:

https://reports.tradeweb.com/closing-prices/gilts/

VAGP is cheaper than the Vanguard Global Bond Fund.

aroominyork

Tondrive said:

Personally i think passive trackers are good for equities but i am not convinced the same applies to bonds.
They may need a more active approach and there are plenty of Funds and Investment Trusts where fees are not much greater than a tracker.

One of the challenges with actively managed bond funds is that fees often are much higher than a tracker. It is easy to pay 0.5%, 0.6%, even 0.7% for active bond management, and even if you succeed in beating the index a high proportion of the marginal gain is likely to be eaten by fees....

Linton said:

Tondrive said:

Personally i think passive trackers are good for equities but i am not convinced the same applies to bonds.
They may need a more active approach and there are plenty of Funds and Investment Trusts where fees are not much greater than a tracker.

I agree with this.  In my view when buying bonds you need to have a fairly precise idea of why you are buying them and then choose those bonds which match your objectives.  ISTM with long dated bond funds you are in danger of increasing volatility without sufficiently increasing returns.

... so one solution is to determine the type of bonds you want - government/corporate, duration, investment grade or high yield - and then but a low cost tracker which matches you objectives.