LifeStrategy 20% Accumulation

DennisTenus

Hi, I have a large amount invested in this fund in a Vanguard ISA.

I dripped my money into the fund slowly from around the middle of 2021 into 2022.

Since middle of 2022 my investment is sitting at around a 14% loss.

I purposely invested in this fund as it was supposed to be lower risk and 12% loss is actually quite a lot. I realise it's still early days but will it recover in the next couple of years or am I looking at 3-5 years for recovery, if it recovers at all that is?

I see that bond yields are up but the fund continues to not show any even slight signs of recovery. Is this because of high interest rates and when interest rates start to come down it will start to recover?

Even if it recovers 14%, there is still the fees on top that I have to pay so it will actually have to recover more than that just to break even.

Or its not likely to recover and I should cut my losses, transfer it to a fixed ISA where I could get a guaranteed 5.8% rate and no more fees!?

I thought a bond, once purchased, pays the stated interest no matter what, so in a fund with 80% bonds, I thought 80% of it could never go down in value. The price of new bonds can go down of course, but I thought a fund like the LS20 locked in the bonds it held.

Clearly I was wrong in that - so is the following true: investing in the LS20 is not the same as owning the bonds, it's a fund traded like anything else based on expectations of future performance? So if bond rates go down people don't want to buy the LS20, and it's price goes down. Is that right?

Thanks

silvercue

2022 was generally a bad year for the markets.  Bonds also recently suffered with the very high interest rates....but I think now they should start to be looking better.    

My ISAs made a loss last year but are doing a lot better this year and I am hopeful 2024 will be a much better years, especially once interest rates start to come down.

jimjames

DennisTenus said:

I thought a bond, once purchased, pays the stated interest no matter what, so in a fund with 80% bonds, I thought 80% of it could never go down in value. The price of new bonds can go down of course, but I thought a fund like the LS20 locked in the bonds it held.

Not quite true. The 80% bond elements have probably got a guaranteed interest payment (coupon) but their value will fluctuate with interest rates so if general interest rates double then the price will vary to make the yield competitive. Bonds are traded and their price will vary hour by hour so certainly isn't something that will never go down in value. These are not like a savings account that uses the word "bond" for marketing but loans issues by companies or governments (in the UK known as gilts)

In terms of what to do, if you sell now you're guaranteed a 14% loss, if you wait it might be increase in value and you might make your original money back. Ironically if you've invested in the 80% or 100% version you'd probably be sitting on a profit or only small loss.

DennisTenus

jimjames said:

Ironically if you've invested in the 80% or 100% version you'd probably be sitting on a profit or only small loss.

Yeah I know, quite frustrating.

InvesterJones

DennisTenus said:

I see that bond yields are up but the fund continues to not show any even slight signs of recovery. Is this because of high interest rates and when interest rates start to come down it will start to recover?

[snip]

I thought a bond, once purchased, pays the stated interest no matter what, so in a fund with 80% bonds, I thought 80% of it could never go down in value. The price of new bonds can go down of course, but I thought a fund like the LS20 locked in the bonds it held.

Clearly I was wrong in that - so is the following true: investing in the LS20 is not the same as owning the bonds, it's a fund traded like anything else based on expectations of future performance? So if bond rates go down people don't want to buy the LS20, and it's price goes down. Is that right?

Regarding the first sentence I quoted, bond yields are inverse to their price - if the yield goes up the price goes down, so the valuation of your fund will decrease because the price of your units will have decreased.

It's a fund of (largely) bonds - I don't think it's stated they hold them to maturity, but instead they trade them much like any other asset a fund might continually purchase and sell. As a result, they are sensitive to the price the market would pay for a bond that the fund is selling - if interest rates go up then coupons on newly issued bonds increase - this means people/funds selling old bonds with lower coupons have to lower the price for anyone to buy them - this pushes up the yield for new buyers, but means the sellers (e.g. your fund, typically when bonds get to the minimum duration period stated in fund details - don't know if LS state such) get a lower price for the asset, and the value of the fund decreases. Conversely, any new bonds the fund purchases will have cost the fund less to acquire. When the yield curve is normal this means funds are buying low and selling high = profit, however when the yield curve is inverted (yield for shorter duration is higher than for longer) then the funds are buying high and selling low.

JohnWinder

If you were to hold individual bonds, bought when you bought your VLS20, it could have been for several reasons eg ‘I like gambling’ with bonds. But a sensible reason would have been ‘I like what these bonds yield, and I trust the bond issuer to pay the coupons regularly and return the principal if I hold them to maturity’. 

Were that the case, you would have noticed the price of your bonds fell quite a bit (maybe 14%) since your purchase. But you wouldn’t have to worry about it because they keep paying the yield you signed up for as well as will return the principal you expect. It’s only if you were forced to sell before maturity, or silly enough to through poor understanding, that those bonds could not live up to your expectations at purchase.  The crucial issue is that no matter what happens to interest rates and bond prices while you hold them, as your bonds creep closer and closer to maturity their price creeps closer and closer to their promised redemption value. You can’t lose.

A bond fund is different in one crucial aspect: the time to maturity stays the same (because the fund promises any customer that its maturity is x years, so they keep it at x years). Because the time to maturity stays the same, the overall price of those bonds is never creeping back towards the promised redemption value as long as interest rates keep moving around (which they do every minute of the day). You are hostage to interest rate moves, the way you aren’t if you hold bonds to maturity. It’s irrelevant whether the fund holds its bonds to maturity or sells some a bit early, or very early, because it has to keep the time to maturity as promised in the prospectus.

There is an upside to being a hostage however; the price falls caused by yield rises means as the bonds progressively get replaced in your fund those new bonds have higher yields than you used to have. Just what you want. Price falls are short term pain for long term gain; unless interest rates rise forever, then it’s long term pain for even longer term gain.

The upshot: be a bit attentive to the time to maturity of your bond funds, so that you can out last the short term pain. Some companies advice ‘this fund is suitable for investors looking to invest for 7-15 years’; stay away from that fund if you’re investing for 3 years, unless you want to take a gamble on interest rates falling.

GazzaBloom

JohnWinder said:

If you were to hold individual bonds, bought when you bought your VLS20, it could have been for several reasons eg ‘I like gambling’ with bonds. But a sensible reason would have been ‘I like what these bonds yield, and I trust the bond issuer to pay the coupons regularly and return the principal if I hold them to maturity’. 

Were that the case, you would have noticed the price of your bonds fell quite a bit (maybe 14%) since your purchase. But you wouldn’t have to worry about it because they keep paying the yield you signed up for as well as will return the principal you expect. It’s only if you were forced to sell before maturity, or silly enough to through poor understanding, that those bonds could not live up to your expectations at purchase.  The crucial issue is that no matter what happens to interest rates and bond prices while you hold them, as your bonds creep closer and closer to maturity their price creeps closer and closer to their promised redemption value. You can’t lose.

A bond fund is different in one crucial aspect: the time to maturity stays the same (because the fund promises any customer that its maturity is x years, so they keep it at x years). Because the time to maturity stays the same, the overall price of those bonds is never creeping back towards the promised redemption value as long as interest rates keep moving around (which they do every minute of the day). You are hostage to interest rate moves, the way you aren’t if you hold bonds to maturity. It’s irrelevant whether the fund holds its bonds to maturity or sells some a bit early, or very early, because it has to keep the time to maturity as promised in the prospectus.

There is an upside to being a hostage however; the price falls caused by yield rises means as the bonds progressively get replaced in your fund those new bonds have higher yields than you used to have. Just what you want. Price falls are short term pain for long term gain; unless interest rates rise forever, then it’s long term pain for even longer term gain.

The upshot: be a bit attentive to the time to maturity of your bond funds, so that you can out last the short term pain. Some companies advice ‘this fund is suitable for investors looking to invest for 7-15 years’; stay away from that fund if you’re investing for 3 years, unless you want to take a gamble on interest rates falling.

Unless I've missed it I can't see any mention of time to maturity in the LS20 fund information.

https://fund-docs.vanguard.com/gb00b4nxy349-en.pdf

I've not looked at the LifeStrategy KIIDs before but I was surprised that LS20 is rated as high as a 4 on the risk/reward profile.

I don't hold any bonds or bond funds but feel for those who had a large chunk of bonds funds in their portfolio through 2022 to date. It must be galling to see 5 years of gains wiped out in such a short period of time, especially as many may have been holding a larger portion in bond funds for safety, some in the lead up to retirement.

A stocks crash can come quicker, be more brutal, but can also recover quicker than the slow churn of bonds through a bond fund. Who knows what the future holds but it may be a long road back to parity for bond fund holders.

JohnWinder

The two biggest bond funds in VLS20 have 72% of their bonds maturing in less than 10 years. You can read up the others if you're interested. Would be more helpful to give a duration figure, but I don't see it as it needs recalculating frequently I suppose.

InvesterJones

Some platforms give a 'modified duration' for the fund of about 8 yrs - so it's pretty long duration stuff on average. That's presumably what they hold, not necessarily what they target.

DennisTenus

InvesterJones said:

Some platforms give a 'modified duration' for the fund of about 8 yrs - so it's pretty long duration stuff on average. That's presumably what they hold, not necessarily what they target.

What do they mean by modified duration?

Thanks everyone for your replies, luckily as I don't need the money (I have other investments and emergency cash) I can sit this out but is it likely that when interest rates start to go down this fund will increase?

dunstonh

I can sit this out but is it likely that when interest rates start to go down this fund will increase?

Yes but not to where it used to be.   That will rely on the yield and take much longer.

If you take a look at the chart below, it shows the unit price of a gilt fund excluding income (blue) and including income reinvested (red).



Unit prices without income reinvested would typically float around the same price but not go up over the long term. 

The credit credit crunch led to quantitative easing that drove down yields and pushed the unit price up into a bubble.   So, this meant gilts had a much better than typical return for a decade but in 2022, the effects of quantitative easing unwound and we are back to ballpark where gilts are expected to be.      

The unit price (excluding income reinvested) is not going to return to where it was in our lifetime.  Technically, I cant say that but it would require a return to post credit crunch style interest rates and you have to go back 300 years to find rates similar previously.

However, the yield is now higher than what it was post credit crunch.  So, some of the return has moved more to income.   Its going to take a long time for the value to return in terms of total return.