How to be sure a bond fund is hedged


Do posters generally agree with this? I think the idea is that the bonds part is supposed to shield you against equity downturns to some extent, and being exposed to FX changes will introduce additional risk when you are trying to reduce your risk?
Also - how do I know if a fund is hedged? For example Vanguard Global Bond Index Fund - if I click into the "Key Investor Information", it says on the PDF file that it's "GBP Hedged" - I guess that's the bit I am looking for so this fund would be suitable based on the above criteria?
So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok? I find the "FTSE" reference confusing because I understand this is actually a fund that invests in the whole world globally?
Comments
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How to be sure a bond fund is hedgedThe fund name will usually say it is. However, you can check the fund particulars if you are unsure.Do posters generally agree with this?The hedging usually comes from the use of derivatives. That brings additional risk but it removes currency risk. I currently have 3 currency hedged funds in my portfolio.Also - how do I know if a fund is hedged? For example Vanguard Global Bond Index Fund - if I click into the "Key Investor Information", it says on the PDF file that it's "GBP Hedged" - I guess that's the bit I am looking for so this fund would be suitable based on the above criteria?That fund is available in multiple share classes which can be hedged and not hedged. The generic documentation may cover all types.I find the "FTSE" reference confusing because I understand this is actually a fund that invests in the whole world globally?There are many FTSE indexes. The fact that some people use it as slang for the FTSE100 is just laziness on their part.So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?If that is what tickles your fancy then yes.
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.2 -
You can use morningstar to group funds and ETFs. Hedged global bonds are in a different category to unhedged ones, which makes comparisions easier.1
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So for example a combination of Vanguard FTSE All World UCITS ETF and Vanguard Global Bond Index fund together could work ok?It’s hard to imagine how they wouldn’t be a good choice. Something different might turn out to give better returns and/or less risk, and one could tweak it here or there in the fussy pursuit of the current image of perfection, but from all we know it’s a well justified choice. Ken French knows a bit about finance, has a Nobel prize for it and a voice that sounds like he’s a clear thinker endorses your approach. Question: ‘are there any cases where it would make sense for someone to pursue an actively managed strategy? Answer: ‘Not that I'm aware of.’ https://rationalreminder.ca/podcast/100.
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OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
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leosayer said:OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
It’s about £220K in a 70/30 mix and £140K in 80/20 (latter one is the one taking ongoing contributions).
I have left them where they are for the moment because the performance looked ok and the company negotiated low charges for those funds and providers. I will need to move at least one of them within the next couple of years as it’s got lifestyling on it (but I left it set to 65 as the retirement age even though I intend to access it before then).
Having read a lot of blogs and info I am pretty comfortable with up to 80/20 mix and I understand that this will mean significant short term volatility.0 -
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Short term government bonds are a very safe ‘low return’ investment, but yes, we’d all like the extra return you get if you take the risk with equities. You wouldn’t take the risk of holding a large % as equities if you were investing for 2-3 years; yearly returns on equities vary too much year to year, sometimes -13% and sometimes +15%. You might commonly be better off with just those bonds for 2-3 years than having equities. It’s because the unexpected equity returns (wide swings) swamp what we know is the average or expected equity return (~5%/year above those bonds’).
But the longer the period you can hold equities the more likely you’ll get the expected or average returns of equities. I think we all know that.
What many of us don’t know or overlook is some measure of how safe you are by holding equities for 10 or twenty years. Based on the last 50 years of US equity returns, 8% is the best estimate of the chance you’d have been better off holding those bonds only than any US equities for a period of 20 years. That’s Fama and French’s equity premium paper of 2017 (?). 20 years, and 8% chance equities will be a dud.
So imagine you’re now retiring and the last decade of equity returns has been poor; they remain so poor during the next decade that you’d have been better off just holding those ultra safe bonds. How strong is your belief in equities that you’ll hold steady with your equity holding, or do you sell out for the safety of bonds just as equites are about to come good? That’s why people hold bonds despite having long investing horizons.
To answer your question: because you might do better, and you might prevent yourself from doing something stupid.
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Pat38493 said:leosayer said:OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
It’s about £220K in a 70/30 mix and £140K in 80/20 (latter one is the one taking ongoing contributions).
I have left them where they are for the moment because the performance looked ok and the company negotiated low charges for those funds and providers. I will need to move at least one of them within the next couple of years as it’s got lifestyling on it (but I left it set to 65 as the retirement age even though I intend to access it before then).
Having read a lot of blogs and info I am pretty comfortable with up to 80/20 mix and I understand that this will mean significant short term volatility.
You don't say how far away you are from age 55-57 but in my case my DC pot was 100% invested in global equity index funds until I got within 5 years of needing to draw on the funds. I didn't see the need to have any protection from stock market volatility before then seeing as I had the DB pension as a backstop.
Once I got within 5 years of my planned retirement I diverted my future contributions into currency hedged short-term (< 5 years) bond funds. When I get within 2 years my future contributions will then go into money market funds.
I found that having a cash-flow plan for my current spending/saving going into the same for retirement really helped me to understand what my annual income requirements would be and how much I should hold in low risk vs high risk funds.
If you are comfortable that the two-fund approach is right for you then get it implemented across the board. Don't rely on fund performance looking 'OK' and don't rely on lifestyling which is unlikely to be suitable for your needs.
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leosayer said:Pat38493 said:leosayer said:OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
It’s about £220K in a 70/30 mix and £140K in 80/20 (latter one is the one taking ongoing contributions).
I have left them where they are for the moment because the performance looked ok and the company negotiated low charges for those funds and providers. I will need to move at least one of them within the next couple of years as it’s got lifestyling on it (but I left it set to 65 as the retirement age even though I intend to access it before then).
Having read a lot of blogs and info I am pretty comfortable with up to 80/20 mix and I understand that this will mean significant short term volatility.
You don't say how far away you are from age 55-57 but in my case my DC pot was 100% invested in global equity index funds until I got within 5 years of needing to draw on the funds. I didn't see the need to have any protection from stock market volatility before then seeing as I had the DB pension as a backstop.
Once I got within 5 years of my planned retirement I diverted my future contributions into currency hedged short-term (< 5 years) bond funds. When I get within 2 years my future contributions will then go into money market funds.
I found that having a cash-flow plan for my current spending/saving going into the same for retirement really helped me to understand what my annual income requirements would be and how much I should hold in low risk vs high risk funds.
If you are comfortable that the two-fund approach is right for you then get it implemented across the board. Don't rely on fund performance looking 'OK' and don't rely on lifestyling which is unlikely to be suitable for your needs.
I am lucky enough as well that as a couple, my wife has a full NHS DB pension already in payment with no early retirement reduction due to having officer status. Therefore by the time we are both 67 between 85% and 97% of our planned future spending will be covered by DB/SP (and that’s already based on maintaining a fairly luxury lifestyle with no cuts).
Also we will probably downsize the house, not only to free up some equity but also the house is too big for us when the kids are gone.
Fund performance ok really means that when I ran historical simulations using the funds I am in now, versus moving everything to the Vanguard funds listed above, the results in terms of success probability were almost identical. What was noticeable though was that the legacy left at the end of life in upside optimistic scenarios was a lot bigger with the Vanguard funds. What I am pretty sure about is that if I move more into bonds, my success probability over the full life will go down not up.
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Pat38493 said:leosayer said:Pat38493 said:leosayer said:OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
It’s about £220K in a 70/30 mix and £140K in 80/20 (latter one is the one taking ongoing contributions).
I have left them where they are for the moment because the performance looked ok and the company negotiated low charges for those funds and providers. I will need to move at least one of them within the next couple of years as it’s got lifestyling on it (but I left it set to 65 as the retirement age even though I intend to access it before then).
Having read a lot of blogs and info I am pretty comfortable with up to 80/20 mix and I understand that this will mean significant short term volatility.
You don't say how far away you are from age 55-57 but in my case my DC pot was 100% invested in global equity index funds until I got within 5 years of needing to draw on the funds. I didn't see the need to have any protection from stock market volatility before then seeing as I had the DB pension as a backstop.
Once I got within 5 years of my planned retirement I diverted my future contributions into currency hedged short-term (< 5 years) bond funds. When I get within 2 years my future contributions will then go into money market funds.
I found that having a cash-flow plan for my current spending/saving going into the same for retirement really helped me to understand what my annual income requirements would be and how much I should hold in low risk vs high risk funds.
If you are comfortable that the two-fund approach is right for you then get it implemented across the board. Don't rely on fund performance looking 'OK' and don't rely on lifestyling which is unlikely to be suitable for your needs.
I am lucky enough as well that as a couple, my wife has a full NHS DB pension already in payment with no early retirement reduction due to having officer status. Therefore by the time we are both 67 between 85% and 97% of our planned future spending will be covered by DB/SP (and that’s already based on maintaining a fairly luxury lifestyle with no cuts).
Also we will probably downsize the house, not only to free up some equity but also the house is too big for us when the kids are gone.
Fund performance ok really means that when I ran historical simulations using the funds I am in now, versus moving everything to the Vanguard funds listed above, the results in terms of success probability were almost identical. What was noticeable though was that the legacy left at the end of life in upside optimistic scenarios was a lot bigger with the Vanguard funds. What I am pretty sure about is that if I move more into bonds, my success probability over the full life will go down not up.Do you actually want to retire?What works for my wife and I is having a plan for when we will both stop work that we know is achievable regardless of what happens to the stock market. This is what low-risk assets give - certainty. What they don't give me is a return above (or even near) inflation but that's an easy trade-off when you have have other index-linked assets. Hence your 'just one more year' plan may be unecessary with the right preparation now.Of course, there's a chance that other life events might scupper the plan but we can only deal with what we know or can reasonably expect to happen. If that happens, we adjust the plan.We have also considered downsizing but we'd want a smaller house in a more expensive area that will cost a crippling amount in stamp duty so we'll probably stay put.1 -
leosayer said:Pat38493 said:leosayer said:Pat38493 said:leosayer said:OP, it's hard for me to agree or not unless you state what the investments will be used for and what your time horizon is.
What % of your investments will be bond funds and how will you decide the % split?
Why do you want to shield yourself against equity downturns when this will inevitably reduce your overall return over long time periods?
Personally, I like Lars Kroijer's approach to low risk assets (bond funds, mm funds and cash with no currency exposure tied to your time horizon) and high risk assets (global equity index funds).
It’s about £220K in a 70/30 mix and £140K in 80/20 (latter one is the one taking ongoing contributions).
I have left them where they are for the moment because the performance looked ok and the company negotiated low charges for those funds and providers. I will need to move at least one of them within the next couple of years as it’s got lifestyling on it (but I left it set to 65 as the retirement age even though I intend to access it before then).
Having read a lot of blogs and info I am pretty comfortable with up to 80/20 mix and I understand that this will mean significant short term volatility.
You don't say how far away you are from age 55-57 but in my case my DC pot was 100% invested in global equity index funds until I got within 5 years of needing to draw on the funds. I didn't see the need to have any protection from stock market volatility before then seeing as I had the DB pension as a backstop.
Once I got within 5 years of my planned retirement I diverted my future contributions into currency hedged short-term (< 5 years) bond funds. When I get within 2 years my future contributions will then go into money market funds.
I found that having a cash-flow plan for my current spending/saving going into the same for retirement really helped me to understand what my annual income requirements would be and how much I should hold in low risk vs high risk funds.
If you are comfortable that the two-fund approach is right for you then get it implemented across the board. Don't rely on fund performance looking 'OK' and don't rely on lifestyling which is unlikely to be suitable for your needs.
I am lucky enough as well that as a couple, my wife has a full NHS DB pension already in payment with no early retirement reduction due to having officer status. Therefore by the time we are both 67 between 85% and 97% of our planned future spending will be covered by DB/SP (and that’s already based on maintaining a fairly luxury lifestyle with no cuts).
Also we will probably downsize the house, not only to free up some equity but also the house is too big for us when the kids are gone.
Fund performance ok really means that when I ran historical simulations using the funds I am in now, versus moving everything to the Vanguard funds listed above, the results in terms of success probability were almost identical. What was noticeable though was that the legacy left at the end of life in upside optimistic scenarios was a lot bigger with the Vanguard funds. What I am pretty sure about is that if I move more into bonds, my success probability over the full life will go down not up.Do you actually want to retire?What works for my wife and I is having a plan for when we will both stop work that we know is achievable regardless of what happens to the stock market. This is what low-risk assets give - certainty. What they don't give me is a return above (or even near) inflation but that's an easy trade-off when you have have other index-linked assets. Hence your 'just one more year' plan may be unecessary with the right preparation now.Of course, there's a chance that other life events might scupper the plan but we can only deal with what we know or can reasonably expect to happen. If that happens, we adjust the plan.We have also considered downsizing but we'd want a smaller house in a more expensive area that will cost a crippling amount in stamp duty so we'll probably stay put.
When I’ve tried to model moving more of my fund into cash or bonds and using buckets, it didn’t seem to make much difference - I still need more money. Sure - there are some historical scenarios where the increased bond allocation protected me and stop them from failing, but there are other scenarios where the lower growth caused the overall plan to fail so it didn’t make much difference overall.
Also it’s of course a discussion we have to finalise as a couple - I might be happy to stop work earlier at the risk of having less to spend on holidays and weekends away each year, whereas my wife might not think that was a good trade off, or vice versa.0
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