Poor pension performance

grumpsthegit

Hi all new to this forum  

I have seen a loss also related to Bonds/income focused funds. Not as bad as the OP and I am a couple years away from retiring, but was wondering what to do. I know if I sell now that loss will be realised, but do you think these will recover over the next few years?

Beddie

grumpsthegit said:

Hi all new to this forum  

I have seen a loss also related to Bonds/income focused funds. Not as bad as the OP and I am a couple years away from retiring, but was wondering what to do. I know if I sell now that loss will be realised, but do you think these will recover over the next few years?

Bond funds have given decent returns over the last 12 months, should be up 10% or more. Have you looked at yours? The interest rate hit last year was a one-off, unless base rates double again (unlikely.) Therefore some of the losses have been recouped from the lows.

Personally I'd say stick with what you have, but it's obviously your decision. If you move out of bonds into shares you increase the volatility and risk, for the chance of greater returns. You might not feel inclined to do that near to retirement.

dunstonh

I have seen a loss also related to Bonds/income focused funds. 

Bond is a term that covers many things.  So, it really depends on what you mean by bonds.
Income focused funds do not necessarily mean bonds.    You can have 100% stockmarket income funds.    

Gilts are the biggest faller with fixed interest securities.  And gilts are typically the most common form of fixed interest security held.  So, its probably those that you are referring to.

but do you think these will recover over the next few years?

Assuming gilts, then my answer would be no.    Excluding income, the unit prices of gilt funds are back to around early 1990s levels.



Above is a chart showing a long standing all market gilt fund.  The blue line shows the unit price with income paid out.   The red line shows the return if income was reinvested.

Broadly speaking, the blue shows that when interest rates rise, the unit price falls and vice versa. You can see the multiple interest rate cycles in the blue line.  So, to see the blue line return to the levels of 2020/21 you would need a range of scenarios that are unlikely to happen.  It would need inflation to be close to zero and interest rates close to zero.    With income removed, you expect the unit price to be wavy line with periods above the launch price and below it but not really going anywhere without the income.

So, you will have to wait enough years for the income to make up most of the shortfall.   Maybe 6-8 years.

Bostonerimus1

dunstonh said:

I have seen a loss also related to Bonds/income focused funds. 

Bond is a term that covers many things.  So, it really depends on what you mean by bonds.
Income focused funds do not necessarily mean bonds.    You can have 100% stockmarket income funds.    

Gilts are the biggest faller with fixed interest securities.  And gilts are typically the most common form of fixed interest security held.  So, its probably those that you are referring to.

but do you think these will recover over the next few years?

Assuming gilts, then my answer would be no.    Excluding income, the unit prices of gilt funds are back to around early 1990s levels.



Above is a chart showing a long standing all market gilt fund.  The blue line shows the unit price with income paid out.   The red line shows the return if income was reinvested.

Broadly speaking, the blue shows that when interest rates rise, the unit price falls and vice versa. You can see the multiple interest rate cycles in the blue line.  So, to see the blue line return to the levels of 2020/21 you would need a range of scenarios that are unlikely to happen.  It would need inflation to be close to zero and interest rates close to zero.    With income removed, you expect the unit price to be wavy line with periods above the launch price and below it but not really going anywhere without the income.

So, you will have to wait enough years for the income to make up most of the shortfall.   Maybe 6-8 years.

The average duration of the "bond fund" will also directly impact the scale of losses and time to recovery. If people were lifestyled into long bonds their pain is going to be far more compared to those with medium to short duration bonds. For people in "all market bond" funds their pain will be somewhere in between.

grumpsthegit

dunstonh said:

I have seen a loss also related to Bonds/income focused funds. 

Bond is a term that covers many things.  So, it really depends on what you mean by bonds.
Income focused funds do not necessarily mean bonds.    You can have 100% stockmarket income funds.    

Gilts are the biggest faller with fixed interest securities.  And gilts are typically the most common form of fixed interest security held.  So, its probably those that you are referring to.

but do you think these will recover over the next few years?

Assuming gilts, then my answer would be no.    Excluding income, the unit prices of gilt funds are back to around early 1990s levels.



Above is a chart showing a long standing all market gilt fund.  The blue line shows the unit price with income paid out.   The red line shows the return if income was reinvested.

Broadly speaking, the blue shows that when interest rates rise, the unit price falls and vice versa. You can see the multiple interest rate cycles in the blue line.  So, to see the blue line return to the levels of 2020/21 you would need a range of scenarios that are unlikely to happen.  It would need inflation to be close to zero and interest rates close to zero.    With income removed, you expect the unit price to be wavy line with periods above the launch price and below it but not really going anywhere without the income.

So, you will have to wait enough years for the income to make up most of the shortfall.   Maybe 6-8 years.

Thanks Dunston:

I have about 40% of my Portfolio in

Royal London Sterling Extra Yield Bond Class Y
Aviva Investors UK Listed Equity Income Class 2
Hargreaves Lansdown UK Income Class A
Artemis High Income Class MI

None are looking good at the moment - at least they have generated some income that I have reinvested and i guess the longer I hold the more income I will get to offset the loss.....

grumpsthegit

just reread your reply Dunston and yes looks like I am in for a long haul to recoup :-( what a bummer

ThomasJ

dunstonh said:

Returns are not down to the pension provider. They are just the administrator following yours or your adviser's instructions. 
They just put it where you or your adviser tells them.  They are not responsible for the returns.  

It seems my problem is not having a FA acting for me. Somewhere, that piece of advice has evaded me!

Bostonerimus1

ThomasJ said:

dunstonh said:

Returns are not down to the pension provider. They are just the administrator following yours or your adviser's instructions. 
They just put it where you or your adviser tells them.  They are not responsible for the returns.  

It seems my problem is not having a FA acting for me. Somewhere, that piece of advice has evaded me!

The problem isn't necessarily having or not having an IFA or FA. The problem many people have is a disconnection between themselves and their invested money; they still have a Defined Benefit mentality in a Defined Contribution world. With a DB pension you put money in and after a number of years you are guaranteed a pension benefit, the employee only has to keep working and contributing. With DC pensions there is no guarantee and all the risk has been transferred from the employer/insurance company to the employee. DC pensions are more flexible than DB pensions, but they require the employee to make investment and drawdown decisions.

JohnWinder

The graph and explanation is informative regarding how bond funds behave. Perhaps one could say ‘when you gain (or lose) on the capital side, you lose (or gain) on the interest side’. 

‘but do you think these will recover over the next few years?

Assuming gilts, then my answer would be no.’

My answer would be ‘yes’, for these reasons. Firstly, the OP told us she was not yet retired, so a reasonable assumption is reinvesting interest payments. Secondly, this was confirmed in a later post. Thirdly, if a fund is yielding 2% then drops in value by half,  it will now be yielding 4% ie faster growth. Fourthly, as the fund progressively replaces older lower yielding bonds with newer higher yielding ones the fund will grow faster than it previously was. Bond investors should prefer higher yielding bonds; just make sure that their potential for capital loss is not more than you can tolerate (by not holding bonds with too long a maturity period).
A fifth reason might be in the title of this recent thread: ‘how long…to recover…’;  not ‘do they recover?’.
https://forums.moneysavingexpert.com/discussion/6470635/how-long-do-bond-funds-take-to-recover-after-a-sharp-rise-in-yields/p1

Bostonerimus1

JohnWinder said:

The graph and explanation is informative regarding how bond funds behave. Perhaps one could say ‘when you gain (or lose) on the capital side, you lose (or gain) on the interest side’. 

‘but do you think these will recover over the next few years?

Assuming gilts, then my answer would be no.’

My answer would be ‘yes’, for these reasons. Firstly, the OP told us she was not yet retired, so a reasonable assumption is reinvesting interest payments. Secondly, this was confirmed in a later post. Thirdly, if a fund is yielding 2% then drops in value by half,  it will now be yielding 4% ie faster growth. Fourthly, as the fund progressively replaces older lower yielding bonds with newer higher yielding ones the fund will grow faster than it previously was. Bond investors should prefer higher yielding bonds; just make sure that their potential for capital loss is not more than you can tolerate (by not holding bonds with too long a maturity period).
A fifth reason might be in the title of this recent thread: ‘how long…to recover…’;  not ‘do they recover?’.
https://forums.moneysavingexpert.com/discussion/6470635/how-long-do-bond-funds-take-to-recover-after-a-sharp-rise-in-yields/p1

That's a really Bogleheads thread.