Short Term Money Market funds

GeoffTF

Qyburn said:

masonic said:

It's worth remembering that traditional bond funds have just given up gains they made earlier when interest rates plummeted.

I fully believe you. It's just I've seen a few posts on here where people have been unhappy with losses made by the bond heavy Vanguard or HSBC multi asset funds. Often the response from other members implies that it was only to be expected, and the OP should have done this or that to avoid losses from their bonds.  Which kind of remove the point of the Vanguard life strategy, or HSBC equivalent, if the end user has to be more proactive than Vanguard or HSBC are able to be.

Neither the central banks nor the markets predicted the rise in interest rates. Interest rates were probably going to rise one day, but they could also stay low for decades, as they did in Japan.

masonic

Qyburn said:

masonic said:

It's worth remembering that traditional bond funds have just given up gains they made earlier when interest rates plummeted.

I fully believe you. It's just I've seen a few posts on here where people have been unhappy with losses made by the bond heavy Vanguard or HSBC multi asset funds. Often the response from other members implies that it was only to be expected, and the OP should have done this or that to avoid losses from their bonds.  Which kind of remove the point of the Vanguard life strategy, or HSBC equivalent, if the end user has to be more proactive than Vanguard or HSBC are able to be.

Buying a bond fund is rather like buying a managed portfolio of fixed term savings accounts, except with a bond fund you can sell out for whatever someone is willing to pay at any time. People in the 2000s invested in a portfolio of hypothetical fixed term savings accounts paying 5-6%. When interest rates fell from 5.5% to 0.25%, people were willing to pay far more for a precious 5 or 6% yielder than face value. The holders of these assets therefore saw a magnificent gain spread over the next decade as interest rate expectations for the future grew ever more modest. 

Around the latter part of the 2010s, several of us in this forum started to associate bond funds with the term 'return free risk' as the returns were so low, a little over 1%, and for that investors had to take on the risk to capital if interest rates rose. People may have bought into bond funds and bond heavy multi asset funds at this point. Returning to the managed portfolio of fixed term savings accounts analogy, they were buying hypothetical long term fixes at 1-2%. When interest rates rose from 0.25% to 5.25%, people were willing to pay far less for a worthless 1 and 2% yielder than face value. What took some by surprise was how fast it happened, because interest rates were returning to historic norms and expectations adjusted much more quickly to this. The holders of these assets therefore saw the value of their assets tumble, such that they were faced with the choice of holding their investment for which they'd locked in 1-2% for perhaps a decade or more, sell on to someone else at a price that would enable them to get a return more in line with current rates. Either way, they locked in this outcome when they fixed at this particular rate, just like those who fixed at a much higher rate earlier.

Where an OP has posted in dismay at their plight, and others have implied it was to be expected, it was only to the extent that there has always been a risk that interest rates would return to normal levels, and unlike stockmarket valuations, there is a clear relationship between bond prices and the prevailing interest rate, so it is predictable and was predicted that this would happen when rates rose - it's just that nobody knew when it was going to happen. 

Ultimately, when you lock in what turns out to be a very poor rate from fixed interest securities, there is no way to get out of it without paying a similar price as you would through holding long term. For someone who intends to be disciplined and hold over the long term, all of this is irrelevant and there is nothing they should do. Over a long enough holding period these ups and downs iron themselves out, but if there are good reasons to believe the returns you are locking in are very low by historical standards, proceed with caution.

Qyburn

Thanks for the explanations

Albermarle

Where an OP has posted in dismay at their plight, and others have implied it was to be expected, it was only to the extent that there has always been a risk that interest rates would return to normal levels, and unlike stockmarket valuations, there is a clear relationship between bond prices and the prevailing interest rate, so it is predictable and was predicted that this would happen when rates rose - it's just that nobody knew when it was going to happen. 

I think it is fair to say that I think you, and a few of the more expert investors on the forum ( that does not include me ) were sending out pretty clear warning signs a couple of years ago, that the bonds/gilts party was about to be over. Due to this and other sources of info I sold a 'retirement bond fund' in a workplace pension that had been showing steady growth for some years. It subsequently dropped 40% but now seems to be stable. I also moved up a risk notch with a couple of multi assets funds ( wish I had done more) 

I have bought back into bonds on a smaller scale, a bit too early in one case ....

NannaH

STMM is currently an ideal alternative to holding cash in a Sipp,  if you are building up a cash pot for early retirement especially.
You get a bit of interest on cash but the STMM yield is higher.
 I suppose you need to convert back to cash if / when interest rates start reducing.

Qyburn

Albermarle said:

.. sending out pretty clear warning signs a couple of years ago, that the bonds/gilts party was about to be over. 

What's a bit disappointing that fund managers and pension schemes didn't do the same. I suppose you could excuse the Vanguard funds that specify a percentage of bonds, but others claim to target a certain risk level.

Honourable mention to Royal London (workplace) whose "Cautious Tracker Lifestyle Strategy" lost a whole lot less over 2022 compared to "Aviva Pension Managed FPP" (private pension). 

masonic

Qyburn said:

Albermarle said:

.. sending out pretty clear warning signs a couple of years ago, that the bonds/gilts party was about to be over. 

What's a bit disappointing that fund managers and pension schemes didn't do the same. I suppose you could excuse the Vanguard funds that specify a percentage of bonds, but others claim to target a certain risk level.

Honourable mention to Royal London (workplace) whose "Cautious Tracker Lifestyle Strategy" lost a whole lot less over 2022 compared to "Aviva Pension Managed FPP" (private pension). 

As you say, the Vanguard multi asset funds are asset allocation managed, so conformed to the 60:40, 40:60, 20:80 ratio specified in their objectives. 

Other funds, such as HSBC Global Strategy are volatility managed, so they are just actively managed to target returns within a given band of volatility. This means that as long as the daily ups and downs are within that band, it doesn't matter how many ups vs downs there are in a period. The value could consistently fall day by day and the fund would conform to its remit.

Then you have the wealth preservation funds, which target growth at or above inflation over medium term (e.g. 5 year periods), of which commonly discussed examples include Capital Gearing Trust and Personal Assets Trust (and their corresponding CG Absolute return and Troy Trojan open-ended sister funds). These have not done so badly and are just about fulfilling their mandate on an NAV basis over the past 5 years, but they've suffered over 2023. They did the right things when inflation started to bite and interest rate rises were on the horizon, but have misjudged things more recently. Active management always carries with it the risk that managers will fail to make the right calls, but there is little cause for complaint when eyeing over this whole economic period.

You also have funds designed to hedge risk for people coming to the point where they buy an annuity. These are heavily invested in long duration bonds and have done exactly what they said on the tin, namely, locked in an annuity rate. It just happens that annuity rates have been rising, so locking in an annuity rate means taking capital losses that prevent you securing a larger annuity. Had annuity rates fallen, that would have been the result of bond prices rising, and the investor would have been protected from missing their target retirement income.

So, the investor pays their money and takes their choice, but it's important to appreciate that "low risk" can mean different things and may not mean low loss potential.

GazzaBloom

Qyburn said:

Albermarle said:

.. sending out pretty clear warning signs a couple of years ago, that the bonds/gilts party was about to be over. 

What's a bit disappointing that fund managers and pension schemes didn't do the same. I suppose you could excuse the Vanguard funds that specify a percentage of bonds, but others claim to target a certain risk level.

Honourable mention to Royal London (workplace) whose "Cautious Tracker Lifestyle Strategy" lost a whole lot less over 2022 compared to "Aviva Pension Managed FPP" (private pension). 

And to think these active fund management teams charge, in some cases significant, fees for their services.

mebu60

NannaH said:

STMM is currently an ideal alternative to holding cash in a Sipp,  if you are building up a cash pot for early retirement especially.
You get a bit of interest on cash but the STMM yield is higher.
 I suppose you need to convert back to cash if / when interest rates start reducing.

That's a question I have been mulling too having recently placed a stash of cash into a STMM fund.

Be most interested to hear views. Thanks.

InvesterJones

mebu60 said:

NannaH said:

STMM is currently an ideal alternative to holding cash in a Sipp,  if you are building up a cash pot for early retirement especially.
You get a bit of interest on cash but the STMM yield is higher.
 I suppose you need to convert back to cash if / when interest rates start reducing.

That's a question I have been mulling too having recently placed a stash of cash into a STMM fund.

Be most interested to hear views. Thanks.

Not sure about the need to move back to cash if interest rates start reducing - a drop in interest rates will likely affect cash just as much as money market funds.You could try and time the market/banks by fixing for a longer term but as stated in this thread, it can't be predicted ahead of time, and fixing cash kind of takes away the main selling point (if prepared to lock away then can consider other investments as well).