Global Bond Index Fund

GeoffTF

thunderroad88 said:

GeoffTF said:

thunderroad88 said:

I’m not sure I get your argument. If the OP has £100k ideally in an ISA and wants £500 a month income to cover a regular expenditure, he’d be better using the Aegon fund which will deliver this income. VLS40 won’t do this with its low yield so he’ll have to sell units to achieve his income requirement. Its record suggests that after 5 years he’ll have marginally more capital growth if he’d chosen the Aegon fund too. Sure he’ll pay £370 more a year to hold the Aegon fund but he’ll more than make up for that with more income and capital growth. Or am I fundamentally missing something here?

Firstly, the total return of Aegon Diversified Monthly Income Fund GBP B Inc was not much better than VLS 40 over the last ten years (which is all the data available):

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SXS5&tab=13

Secondly, whoever picked the Aegon fund said it was "a good one". You can only pick a good one after the event. You cannot predict which funds will be a good ones in the future. VLS is a reasonable choice if the risk level is suitable for you. We cannot say whether it will be good or bad though, or whether it will be better or worse than its competitors. We will only be able to make that judgement in the future, when it will be too late. What we do know is that passive funds beat most of the more expensive managed funds, and the proportion of the managed funds that are beaten increases steadily over time.

But the Aegon fund WAS better than VLS and isn’t the reason you think VLS is reasonable exactly because of its history? The OP also seemed to want a decent level of income, which I think the Aegon fund should provide plus, based on its history, reasonable capital growth. Frankly, I’m not quite sure anymore what the OP wants…

No, that is not my reason for believing that VLS is a reasonable approach. The history of VLS is irrelevant. As I have said, performance cannot be predicted in advance. Funds that did well (before costs) over one time period, are no more likely to do well (before costs) over the next time period than those that did badly (before costs). VLS is reasonable because it a basket of low cost tracker funds selected by a market leading fund manager who likely knows more about it than most people. It also has a relatively easy to understand method of controlling risk (bond percentage).

dunstonh

aroominyork said:

dunstonh said:

And another option open to the up is bucketing.

A short term bucket in their investments covering the withdrawals (using STMM, ST Gilts/bonds and a small amount of developed equity funds -inc units) for x months worth of draws in conjunction with a cash float.   The remainder held with ratios based on the longer timescale.

Why are there equities in the short term bucket? I though that bucket should strictly be cash or cash-like, with longer-term/IG bonds in the middle bucket and equities in the growth one?

If cash is you very short term bucket than a small amount of equities in the next bucket is fine.   Especially if you are using income units across the board, which replenishes the cash.

would a simpler strategy for someone be to sell part of accumulation funds which are in heavy gain (difference between value now and what was invested three years ago) and stick this in an income generating investment whic currently provides around 5%? for example a fixed rate bond? This would tie in with the solutions Linton has suggested. Said capital gain would not suffer from taxation as it is possible to claim a loss from previous years.

Over the next 30 years, will there always be income-generating investments that provide 5%?  Bonds are only 5% now because of current interest rates.  What happens when they are not around?

You would also need to rely on timing the market.  What happens if there are no losses in the periods in question? Volatility may exist, but if it is slightly upwards, then you may never see a loss back lower than the starting point.

There are many ways to a skin a cat.   Different strategies will have periods when they are best and when they are worst.   So, you should have some mitigation in place for when your strategy is going to go through a period when its not optimal.

GeoffTF

MarcoM said:

thunderroad88 said:

GeoffTF said:

thunderroad88 said:

I’m not sure I get your argument. If the OP has £100k ideally in an ISA and wants £500 a month income to cover a regular expenditure, he’d be better using the Aegon fund which will deliver this income. VLS40 won’t do this with its low yield so he’ll have to sell units to achieve his income requirement. Its record suggests that after 5 years he’ll have marginally more capital growth if he’d chosen the Aegon fund too. Sure he’ll pay £370 more a year to hold the Aegon fund but he’ll more than make up for that with more income and capital growth. Or am I fundamentally missing something here?

Firstly, the total return of Aegon Diversified Monthly Income Fund GBP B Inc was not much better than VLS 40 over the last ten years (which is all the data available):

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SXS5&tab=13

Secondly, whoever picked the Aegon fund said it was "a good one". You can only pick a good one after the event. You cannot predict which funds will be a good ones in the future. VLS is a reasonable choice if the risk level is suitable for you. We cannot say whether it will be good or bad though, or whether it will be better or worse than its competitors. We will only be able to make that judgement in the future, when it will be too late. What we do know is that passive funds beat most of the more expensive managed funds, and the proportion of the managed funds that are beaten increases steadily over time.

But the Aegon fund WAS better than VLS and isn’t the reason you think VLS is reasonable exactly because of its history? The OP also seemed to want a decent level of income, which I think the Aegon fund should provide plus, based on its history, reasonable capital growth. Frankly, I’m not quite sure anymore what the OP wants…

op wants 5% per annum on average or thereabouts.

How long is he going to live? He is very unlikely to be able to sustain a 5% index linked income from current valuations.

redpete

I've used it for some time as my main bond holding to balance equity funds.  Currently moving out of the fund and into a small number of divergent UK government bond funds with the theory that corporate bonds are not as independent of corporate equities.

GeoffTF

redpete said:

I've used it for some time as my main bond holding to balance equity funds.  Currently moving out of the fund and into a small number of divergent UK government bond funds with the theory that corporate bonds are not as independent of corporate equities.

The Vanguard Global Aggregate bond funds have only government bonds and investment grade corporate bonds. The average credit rating of the bonds is the same as for gilts. Gilts are cheaper, but do not provide a wide a spread of risk, and do not reduce portfolio volatility by as much.

Linton

dunstonh said:

aroominyork said:

dunstonh said:

And another option open to the up is bucketing.

A short term bucket in their investments covering the withdrawals (using STMM, ST Gilts/bonds and a small amount of developed equity funds -inc units) for x months worth of draws in conjunction with a cash float.   The remainder held with ratios based on the longer timescale.

Why are there equities in the short term bucket? I though that bucket should strictly be cash or cash-like, with longer-term/IG bonds in the middle bucket and equities in the growth one?

If cash is you very short term bucket than a small amount of equities in the next bucket is fine.   Especially if you are using income units across the board, which replenishes the cash.

would a simpler strategy for someone be to sell part of accumulation funds which are in heavy gain (difference between value now and what was invested three years ago) and stick this in an income generating investment whic currently provides around 5%? for example a fixed rate bond? This would tie in with the solutions Linton has suggested. Said capital gain would not suffer from taxation as it is possible to claim a loss from previous years.

Over the next 30 years, will there always be income-generating investments that provide 5%?  Bonds are only 5% now because of current interest rates.  What happens when they are not around?

You would also need to rely on timing the market.  What happens if there are no losses in the periods in question? Volatility may exist, but if it is slightly upwards, then you may never see a loss back lower than the starting point.

There are many ways to a skin a cat.   Different strategies will have periods when they are best and when they are worst.   So, you should have some mitigation in place for when your strategy is going to go through a period when its not optimal.

As a (partial) income investor for over 25 years it is my memory that 5% has always been a reasonable, possibly marginally higher risk, dividend expectation.  I have not yet seen any significant increase in dividend rates over the past couple of years, certainly nothing anywhere near the increase in BoE rate.

Similarly I think much the same applies to corporate bonds.  At the higher end rates are more dependent on the perceived risk than on the rates that apply to zero risk bonds.  Given that companies will always need loans for re-investment and expansion I do not believe that there is a serious risk that corporate bonds paying a useful interest rate will no longer be available.    Unless of course companies globally cease wanting to expand, a situation when low bond returns may not be an over-riding concern.

But I agree it would be foolish not to diversify your income generation.  Apart from changes in the markets over time and the need to diversify across different types of companies generally  it is possible that you will have a range of different time-frame and risk dependent objectives for your income.

JohnWinder

'I’m not sure I get your argument. If the OP has £100k ideally in an ISA and wants £500 a month income to cover a regular expenditure, he’d be better using the Aegon fund which will deliver this income'

I agree, he'd be better off in it being easier; we don't know whether he'd (would/will) be better off in terms of total return to spend as future returns of both options are unknown. I hadn't read that he wanted monthly cash drops.

'Its record suggests that after 5 years he’ll have marginally more capital growth if he’d chosen the Aegon fund too. Sure he’ll pay £370 more a year to hold the Aegon fund but he’ll more than make up for that with more income and capital growth. Or am I fundamentally missing something here?'

As noted, you've gone from 'the (past) record suggesting (Aegon will be better than VLS)', which is fair enough, to thinking it's likely to happen in future. Because past returns do not predict future returns, we should have equipoise about the next 5 years for Aegon and VLS, because our experience has shown us so many times that returns see saw between better and worse over short periods. Now, adjust our equipoise, if possible, with the new evidence from SPIVA etc, and I think you've got an argument in favour of VLS.

I can't tell from your writing, where you said 'he WILL more than make up for higher fees', whether you mean the record suggests he will or whether you think he actually will. 'Suggest' and 'WILL' are in different sentences, so I'm thinking you mean he actually WILL be better off with Aegon. Can't say that surely.

dunstonh

As a (partial) income investor for over 25 years it is my memory that 5% has always been a reasonable, possibly marginally higher risk, dividend expectation.

it has been.  However, it was a reference to "fixed rate bond" that made me think that poster wasn't referring to the same thing as you.

thunderroad88

JohnWinder said:

I can't tell from your writing, where you said 'he WILL more than make up for higher fees', whether you mean the record suggests he will or whether you think he actually will. 'Suggest' and 'WILL' are in different sentences, so I'm thinking you mean he actually WILL be better off with Aegon. Can't say that surely.

Sorry, I forgot that wording in this forum needs to be more conservative than definitive…I indeed should have said that he might be better off with Aegon given the income requirement. Anyway, it was just put out there as a thought for the OP…

Hoenir

Linton said:

dunstonh said:

aroominyork said:

dunstonh said:

And another option open to the up is bucketing.

A short term bucket in their investments covering the withdrawals (using STMM, ST Gilts/bonds and a small amount of developed equity funds -inc units) for x months worth of draws in conjunction with a cash float.   The remainder held with ratios based on the longer timescale.

Why are there equities in the short term bucket? I though that bucket should strictly be cash or cash-like, with longer-term/IG bonds in the middle bucket and equities in the growth one?

If cash is you very short term bucket than a small amount of equities in the next bucket is fine.   Especially if you are using income units across the board, which replenishes the cash.

would a simpler strategy for someone be to sell part of accumulation funds which are in heavy gain (difference between value now and what was invested three years ago) and stick this in an income generating investment whic currently provides around 5%? for example a fixed rate bond? This would tie in with the solutions Linton has suggested. Said capital gain would not suffer from taxation as it is possible to claim a loss from previous years.

Over the next 30 years, will there always be income-generating investments that provide 5%?  Bonds are only 5% now because of current interest rates.  What happens when they are not around?

You would also need to rely on timing the market.  What happens if there are no losses in the periods in question? Volatility may exist, but if it is slightly upwards, then you may never see a loss back lower than the starting point.

There are many ways to a skin a cat.   Different strategies will have periods when they are best and when they are worst.   So, you should have some mitigation in place for when your strategy is going to go through a period when its not optimal.

As a (partial) income investor for over 25 years it is my memory that 5% has always been a reasonable, possibly marginally higher risk, dividend expectation.  I have not yet seen any significant increase in dividend rates over the past couple of years, certainly nothing anywhere near the increase in BoE rate.

Similarly I think much the same applies to corporate bonds.  At the higher end rates are more dependent on the perceived risk than on the rates that apply to zero risk bonds.  Given that companies will always need loans for re-investment and expansion I do not believe that there is a serious risk that corporate bonds paying a useful interest rate will no longer be available.    Unless of course companies globally cease wanting to expand, a situation when low bond returns may not be an over-riding concern.

But I agree it would be foolish not to diversify your income generation.  Apart from changes in the markets over time and the need to diversify across different types of companies generally  it is possible that you will have a range of different time-frame and risk dependent objectives for your income.

There's an enormous amount of refinancing in the pipeline in the decades ahead. The ultra low yields that corporate borrowers were able to lock into during the QE era will progressively unwind. Likewise much of the existing issued debt is currently sitting on the balance sheets of the Fed and ECB.  Will be unloaded as part of QT. The BOE has already offloaded all the Corporate Bonds on it's balance sheet. Unlike the other two Central Banks now only holds Conventional Gilts as assets.