What's your portfolio?

aroominyork

Alexland said:

aroominyork said:
So unhedged AGGG instead of hedged AGBP? I get the logic although it goes against the usual advice; maybe this is a sophisticated vs. unsophisticated investor issue. It's important and seems to merit its own thread.

I'd agree with Masonic when the stock market crashes people tend to flee to the safety of USD which causes unhedged global bonds to increase in GBP value. So if you are looking to simply reduce portfolio volatility with bonds then going unhedged has been a good strategy for a UK investor. Especially as some of us might take the opportunity to over-rebalance some (maybe eventually all) of the bonds back into equities... Keeping bonds long term I guess it depends on what you are going to spend the money on as to if hedged or unhedged would be more appropriate to preserve spending power.

Standard advice is to hedge bonds. Is this intended as a KISS strategy for people who want to avoid shocks with the safe side of their portfolio? What are IFAs’ (dunstonh, hello?) approaches to this?

So an unhedged bond fund is more volatile but also, if there is a rush to USD, likely to perform better during a global equity crash. Is the time to hold it i) if you have exhausted cash and maybe gilts during drawdown, or ii) for profit taking when everything else has done badly?

where_are_we

inflationbuster said:

I am retired and hundred percent of my SIPP is in BT shares.  It’s not 100 of my pension as l have a 2nd pension (company).

Having 100% of SIPP in BT shares is very high risk and not recommended. The only time I ever had a lot of money in one share was when Royal Mail privatised, and being a Royal Mail employee I was able to purchase £10000 of their shares at the offer price which was widely previewed as being very generous. I sold out soon afterwards at a generous premium. I am glad I didn`t keep those shares because they have underperformed since.

Nowadays, myself and OH`s wealth is mainly in passive whole world ETF`s and a little in some IT`s all wrapped in Isa`s and SIPPs plus a little (3%) in P2P IFISA`s. Because of our age (seventies) the rest of our wealth is in cash (30%) -  some fixed cash ISA`s but mostly Regular Savers earning between 5.25% and 9%  averaging over 6%. Most of the cash held outside ISA`s is in my OH`s name, because her low income enables her to utilise the Starting rate for savings of £5000.

hallmark

Funny that nobody has mentioned their qualifying NI years even though a full allowance currently provides a pension that'd cost about £250k if it was a SIPP being used to purchase an annuity. So it's not a meaningless amount.

aroominyork

In defense of hedging bonds https://occaminvesting.co.uk/the-best-vanguard-bond-funds-for-uk-investors/

There are very few no-brainers in investing, but hedging currency exposure for bond funds is one of them.

Currencies can, and do, fluctuate significantly in the short term. Brexit is the obvious example which springs to mind – the impact of currency volatility was felt by every UK citizen whose overseas holidays became 10% more expensive overnight.

Because bonds are low risk/low return assets, large foreign exchange fluctuations can overwhelm the risk/returns offered by the bonds. Holding a safe, low yielding bond isn’t going to act like a safe, low yielding bond if it’s held in Mexican Pesos. Because it’s held in a volatile foreign currency, your bond exposure will end up looking more like you’re holding Mexican Pesos in your portfolio than safe bonds.

For that reason, to ensure the bond exposure retains its low-volatility function, hedging out the foreign currency fluctuations is sensible for most investors.

Of course, hedging can’t be done for free. But given most passive bond ETFs have expense ratios under 0.30%, the price paid for hedging is not particularly high, especially when compared against the diversification and risk-reduction benefits it provides.

I like Occam (although he stopped this blog in 2022) but is this a KISS approach that focuses on bonds' 'low-volatilty function' and does not take into account the situations where you might draw on them?

Alexland

aroominyork said:

I like Occam (although he stopped this blog in 2022) but is this a KISS approach that focuses on bonds' 'low-volatilty function' and does not take into account the situations where you might draw on them?

Yes too simplistic. The above seems to be thinking about bond volatility in isolation for someone thinking purely about preserving their pounds not how it would play into a multi asset portfolio for a UK investor during a stock market crash or long-term preserving global spending power. It's unlikely many of us are heavy on Mexican Pesos. But then not all stock market crashes are the same and I guess there are some extreme scenarios where people would be panic moving money away from the USD into GBP but they don't seem to happen very often. If the USA falls we are probably all in trouble.

For many of us our main S&S investments will be towards retirement where our local UK spending on council tax, etc will be mostly covered by the state pension anyway with everything else like buying car parts, importing food, etc being relative to global pricing. Even for the local UK spending some of that will be influenced by the costs that other people in the UK working for us (like people working at the council) are paying to import goods.

aroominyork

The factsheet for AGGG says 18.52% of holdings are US - although the top ten only total 52% with Germany in tenth place at 2.08%. Maybe HL's 31.24% for the US is more accurate. In either case, does this mean the 'rush to USD protection' only applies to 20%-30% of the holdings?

Edit: This iShares site (Exposure breakdowns > Geography) says US 40.24% but the question stands.

Bostonerimus1

hallmark said:

Funny that nobody has mentioned their qualifying NI years even though a full allowance currently provides a pension that'd cost about £250k if it was a SIPP being used to purchase an annuity. So it's not a meaningless amount.

State Pension doesn't usually get included in your "portfolio", but it's obviously part of most personal finances and one source of retirement income. Right now I'm fully paid up with UK NI contributions ie 35 years and have almost 30 years of US social security payments so will get that as well. My US social security pension will be almost 3 times my UK state pension amount.

Bostonerimus1

MX5huggy said:

inflationbuster said:

I am retired and hundred percent of my SIPP is in BT shares.  It’s not 100 of my pension as l have a 2nd pension (company).

😮 wow that’s a bold strategy. 

Agreed! I knew a guy who worked for a large company that had his pension invested in company shares and it went bankrupt and basically wiped out his pension...eggs in one basket comes to mind. He had the excuse that he had no option; there's no reason to do it in a SIPP.

InvesterJones

hallmark said:

Funny that nobody has mentioned their qualifying NI years even though a full allowance currently provides a pension that'd cost about £250k if it was a SIPP being used to purchase an annuity. So it's not a meaningless amount.

True, but have you ever tried to get through to them on the phone to do anything about it?!

masonic

aroominyork said:

The factsheet for AGGG says 18.52% of holdings are US - although the top ten only total 52% with Germany in tenth place at 2.08%. Maybe HL's 31.24% for the US is more accurate. In either case, does this mean the 'rush to USD protection' only applies to 20%-30% of the holdings?

Edit: This iShares site (Exposure breakdowns > Geography) says US 40.24% but the question stands.

There will be a lot of debt issued outside the US that is denominated in USD, and including that (rather than going for US Treasuries and corporates only) will improve your yield but provide the same currency effects, at the risk of credit spreads widening on those holdings during stress conditions. Global unhedged bonds, when paired with global cap-weighted equities, give rise to a lower ulcer index and higher baseline return in GBP than if you used intermediate duration gilts or US treasuries or combinations of the three. HSBC Global Strategy seems to use their own house global government and global corporate bond funds, and the version appears to be USD-hedged. iShares offers AGGU and SAGG, both at the same 0.1% OCF. Coming back to your question around the general (inc Monevator) recommendation to GBP-hedge, this is in the context of volatility reduction. So as with many things, it's different strokes for different folk, and some might prioritise a smooth ride, whereas others want an efficient frontier.