Suggestions for Bond funds to de-risk into retirement

GazzaBloom

Dh6 said:

Welcome back Thrugelmir 

LOL...welcome you say?, he spreads his pessimistic pearls of condescending misery over on the Citywire funds forum, we don't need it back here.

JohnWinder

‘However my personal opinion is that bonds do benefit from active management, more than making up for the fees. Many on here will of course disagree!’ 

‘Can’ more than ‘do benefit’ I’d suggest. Some do, more don’t. Just tell us how to choose the ones that will, not have.

‘I tend to somewhat agree to a point.    When I look at the portfolios with underlying passives only vs the hybrid portfolios (mix of  active and passive) - I ignore the fully active - then generally, you often fund the hybrid does better in negative or volatile periods and the passive does better in positive periods.  Its a big generalisation as not all negative events work out like that.’

Were it so, and we await the data, can we separate whether it’s the equities or the bonds in these funds that result in the impression of results? And if it were so, ought we be swapping between funds when ‘negative or volatile periods’ occur to get better returns?

‘For Government Bond (USD) funds (with UK managers), 86% underperformed the iBoxx Global Government United States in H1 2023, the highest underperformance rate among our fixed income categories. Meanwhile, Government Bond (GBP) funds performed relatively better, with 52% underperforming the iBoxx Sterling Gilts in the first half of 2023, although underperformance increased to 95% when measured over a ten-year period.

European corporate bond funds outperformed their high yield and government bond peers. Only 54% of Corporate Bond (EUR) funds underperformed the iBoxx Euro Corporates. Meanwhile, 79% of High Yield Bond (EUR) funds underperformed the iBoxx Euro Liquid High Yield, while 81% of Government Bond (EUR) funds underperformed the iBoxx Euro Sovereigns in H1 2023.’ https://www.evidenceinvestor.com/another-dire-spiva-report-for-uk-and-eu-funds/ Published yesterday, so some may not have seen this yet.

We were once told SPIVA misled us since UK equity managers were smarter than US managers, until the data showed the UK managers still weren’t smart enough to make ‘active’ a better strategy. Then we heard emerging market equities favoured ‘active’ since the area was less well researched, until SPIVA showed it was still a losing area for active funds. We don’t hear that anymore, so has the refrain turned to bonds?  If you’re investing in equities and bond funds for longer than a couple of years the lower cost way seems to be the more profitable way.

GazzaBloom

As expected returns are lower with bonds than equities surely the increased fees for active management erode those returns more significantly over time on a managed bonds fund? So, the active management performance has to be higher, and maintained consistently, to beat a bonds index.

If/when I buy into a bonds fund it will be a low cost passive index tracker as I don't fancy the lottery of trying to pick a winning fund management team in advance.

dunstonh

We were once told SPIVA misled us since UK equity managers were smarter than US managers, until the data showed the UK managers still weren’t smart enough to make ‘active’ a better strategy. 

SPIVA still supports that view.      You look at some countries and as many as 99% lagged their benchmark but the UK is closer  7x%.       Remember, that will include all the closet trackers and computer managed funds of legacy companies.    Anyone doing research would be eliminating all of those by default.

For Government Bond (USD) funds, 86% underperformed the iBoxx Global Government United States in H1 2023, the highest underperformance rate among our fixed income categories. Meanwhile, Government Bond (GBP) funds performed relatively better, with 52% underperforming the iBoxx Sterling Gilts in the first half of 2023, although underperformance increased to 95% when measured over a ten-year period.

Sterling moved by 6% in that period.   So, funds that were not hedged vs funds that were hedged would have quite a difference.  Plus, virtually all the funds (if not all of them) in the Government Bond USD sector are trackers.

OldScientist

While written from a US perspective, an exploration of the effect of different durations of bond fund (including duration matching) on safe withdrawal rates can be found at Safe Withdrawal Rates: Does it matter if the bond component is short, intermediate, or long?

In brief the outcomes support the generally held rule of thumb that 'intermediates' or possibly 'shorts' represent a good compromise between returns and volatility, although this does beg the question as to exactly what is meant by 'intermediate'. 

In the US, total bond market since 1978 has had a duration of between 4 and 6 years, while one version of short (maturities 1 to 3 years) has had a duration of around 2 years. However, in the UK, the 'all stocks' gilt index (and funds following that index - which is the majority of passive gilt funds) has had durations of between 6 years (back in 1999), peaked at 13 years (around 2020) before falling to around 8 years now. The durations of 'long' gilt funds (maturities of 15 years or more) have ranged from 10 (1999) to 20 (2020) and now back to about 16 years over the same period. Short gilt funds (maturities 0 to 5 years) of which there are only a few available, have had durations around the 2.5 year mark with fluctuations of around 0.5 year.

Fixed rate interest savings accounts can be assumed to have a duration roughly equal to remaining time to maturity.

While the thread linked above also notes that using glides (i.e., duration matching) does not necessarily improve the historical performance, one approach to duration matching is to match the combined duration of bonds funds to half the life expectancy. For example, at 65 life expectancy in the UK is 20-22 years (depending on M/F), so a combined bond fund duration of 10 years would be about right. Assuming all stocks has a duration of 8 years and 'long' one of 16 years, holding 25% long (the latter calculated using (10-8)/(16-8) ) and 75% 'all stocks' would match the required 'spending' duration. The ratio of long and all stocks (or short and all stocks) would have to be rebalanced periodically to account for changes in fund duration and life expectancy. How frequently that rebalancing should be done is another question! As stated before, there is little evidence that the additional complexity results in any better outcome once in drawdown.

Bostonerimus1

Given the OP's reserves above what is required to support their lifestyle I'd ask whether bonds need be part of their retirement portfolio at all or if they should, at least, be looking at a rising equity allocation as their retirement progresses. Also have they considered a portfolio of equities, an annuity, and cash? An indexed annuity is the ultimate de-risker.

Cus

GazzaBloom said:

Dh6 said:

Welcome back Thrugelmir 

LOL...welcome you say?, he spreads his pessimistic pearls of condescending misery over on the Citywire funds forum, we don't need it back here.

I would welcome him back, but I wish he would use more commas.

older_and_no_wiser

Bostonerimus1 said:

Given the OP's reserves above what is required to support their lifestyle I'd ask whether bonds need be part of their retirement portfolio at all or if they should, at least, be looking at a rising equity allocation as their retirement progresses. Also have they considered a portfolio of equities, an annuity, and cash? An indexed annuity is the ultimate de-risker.

Yes I agree with this summary. As I was reading someone's post about them converting their pension into cash or money market funds I was thinking they should just go straight into an annuity. It's a guaranteed income for life with no stress. I don't think that's for me though. Cash will be part of it though. I'm happy to keep a couple of years living expenses in high interest easy access savings accounts. Then just keep topping up as required from the investment accounts.

JohnWinder

ColdIron said:

A cautionary word about bond indexes to consider by Jim Leaviss from M&G's Bond Vigilantes

• Let me start by restating our opposition to index investing when it comes to corporate bonds (we would say that, wouldn’t we). An equity index is an index of success – as the company prospers and its market capitalisation rises, its weighting in the index increases. Bond indices are buckets of failure. The more a company borrows, the greater its weighting in the bond index. If you follow a bond index, and a company within it doubles its leverage, making its failure more likely, you will have to increase your exposure to that company.

NB This applies to corporate debt and not sovereign debt

He clearly know a bit about bonds, the old Jim, and a likeable enough blogger. But he didn't reward his investors any more than they'd have been in the index funds he bagged. His long term investors would have been better of in an index fund over the last 20+ years according to our bete noire, another blogger:  'According to Trustnet, over the course of his career, Jim Leaviss has produced an annualised total return of 2.6%. Over the same period, the annualised total return of the index has been approximately 3.06%.'

https://www.evidenceinvestor.com/jim-leaviss-bond-fund-manager/