Vanguard Global Bond Index Fund GBP Hedged Acc...thoughts?

GazzaBloom

On the commencement of interest rate reduction by BOE I have just pulled the trigger and converted all my wrapped  cash that I have been accumulating and bought the Vanguard Global Bond Index Fund GBP Hedged Acc. to act as counterbalance to my equity index fund holdings.

I will be 80/20 equity/bonds index funds inside my pension at the point of retirement drawdown.

I had always planned to switch from cash (earning BOE base rate) to a bonds fund at some point and from a timing perspective that point was probably some months ago but long term is what I am looking at taking care of as I have only started building lower risk/risk off to my equity index fund holdings this year.

Does anyone have any thoughts on this Vanguard bonds fund? After much deliberation I didn't  like the look of any of the recommended shortlist of bonds funds Aviva offer so went to the funds supermarket and selected the Vanguard fund. Overall annual fees will be 0.31% including my 0.16% pension AMC.

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000003VEC

masonic

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

GazzaBloom

masonic said:

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

The reason for holding a 20% "risk-off" as cash is to act as a slight dampener to equity volatility and with the added bonus of being around 4 years worth retirement living expenses that could be used to rebalance with equities annually or even used in lieu of equities for drawdown in a serious market downturn.

I have hummed and hawed about switching the cash to bonds for months, especially as we saw what happened in 2022/3 with bonds. Bonds are lower risk but not "risk-off" but cash will lose value over the long term to inflation where the bonds fund may match or slightly exceed inflation long term.

It's been a dilemma for me.

Linton

GazzaBloom said:

On the commencement of interest rate reduction by BOE I have just pulled the trigger and converted all my wrapped  cash that I have been accumulating and bought the Vanguard Global Bond Index Fund GBP Hedged Acc. to act as counterbalance to my equity index fund holdings.

I will be 80/20 equity/bonds index funds inside my pension at the point of retirement drawdown.

I had always planned to switch from cash (earning BOE base rate) to a bonds fund at some point and from a timing perspective that point was probably some months ago but long term is what I am looking at taking care of as I have only started building lower risk/risk off to my equity index fund holdings this year.

Does anyone have any thoughts on this Vanguard bonds fund? After much deliberation I didn't  like the look of any of the recommended shortlist of bonds funds Aviva offer so went to the funds supermarket and selected the Vanguard fund. Overall annual fees will be 0.31% including my 0.16% pension AMC.

https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000003VEC

I agree with Masonic in querying what you expect your bond fund to do for you.  At only 20% it is not going to have a lot of impact on the behaviour of the 80% equity generally.

When you say this is your portfolio "at the point of requirement" do you mean you will continue with this allocation though retirement? If so what is your retirement financial strategy?  Your choice of funds and allocations should reflect it.  A general global bond fund will comntain a significant % of longer dated bonds which can be quite volatile.

masonic

As long as "slight" is all you are looking for... Take for example the Covid crash, which is the best example of an equity crash within the lifetime of the fund. S&P500 (which I believe is your world index of choice) fell 20% in Sterling terms, while the aggregate bond fund fell 6%. A 20% holding in the latter would have reduced the 20% loss to 17%.

After that you'd be out of balance by about 1%, so could rebalance about £1k/£100k back into equities. Of course crashes bigger than 20% are possible, and many are considerably longer in duration than the Covid crash was. But I would value the ability to avoid being a forced seller of equities above any slight reduction in volatility or rebalancing benefit.

Regarding cash vs bonds vs inflation, what has been the case historically may not be the case over the rest of your lifetime. These three all bounce around in similar ranges, so I would not want to rank order them over the long term from here. The low risk asset class typically used as a hedge against inflation is of course inflation linked bonds. Much depends on what happens to inflation in the medium to long term as to how these perform. I think I will stick to my plan to hold some of each when I am in the early years of retirement.

aroominyork

This Vanguard bond fund is my default (though not only) bond fund. While a bit of me still tries to beat the market - both in equities and in corporate bonds - I am increasingly investing in funds which, if they performed badly, would give me nothing to chastise myself about, and a hedged global aggregate bond fund fits that bill. This article about the fund might interest you although nb I think it is from late 2020 https://occaminvesting.co.uk/the-best-vanguard-bond-funds-for-uk-investors/

Albermarle

masonic said:

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

Although I read in this very recent 'mini crash', that US investors were piling into safe haven bonds and pushing yields down. I did not follow all the detailed numbers, but this switching between equities and bonds in a market stress situation still seems to happen in the traditional way, now this massive correction in bond prices seems to be out of the way.
The odd thing at the moment is that money market funds/savings accounts are paying more than inflation, and it may stay that way for a year or two ( maybe) .

aroominyork

Albermarle said:

masonic said:

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

The odd thing at the moment is that money market funds/savings accounts are paying more than inflation, and it may stay that way for a year or two ( maybe) .

Indeed. When you can get inflation+3% in cash it makes you wonder what bonds' advantages are on a risk/return basis. I only see two answers: that they might rise in capital value during an equity crash, and that it's difficult to predict the right time to move back into them. 

masonic

Albermarle said:

masonic said:

I think you need to be clear on your reason for holding it. If it is to serve as a low risk pot to draw from if equities tank, then it is a good choice now that money market funds will be offering lower forward returns. You can't, however, expect it to do much to counter falls in equities when they crash. About half the time such a fund is likely to have a negative period while equities are falling. I doubt you have a better option available to you in your pension.

Although I read in this very recent 'mini crash', that US investors were piling into safe haven bonds and pushing yields down. I did not follow all the detailed numbers, but this switching between equities and bonds in a market stress situation still seems to happen in the traditional way, now this massive correction in bond prices seems to be out of the way.
The odd thing at the moment is that money market funds/savings accounts are paying more than inflation, and it may stay that way for a year or two ( maybe) .

Yes there was a very detectable increase in bond prices on Friday that coincided with the release of the US jobs report that put markets in a panic. You can see it clearly in VAGS (the ETF version of the fund we are discussing). This is typically what you'd expect to see in the short term as panic sets in, but reversals are not uncommon as events develop. FOMC is probably wishing it did a 0.25% cut when it had the chance with the benefit of hindsight! Who knows where we'll be when the September meeting comes around.

Agreed, with the yield curve still inverted, and lots of hawkish sentiment around the world cash is still looking attractive. One can certainly lock in some good rates in the hope that inflation doesn't bubble back up. The risk being we are walking into stagflation and rates might not follow the course that's predicted.

It's good to keep one's options open.

OldScientist

I have held this fund in the past. Good points are that the modified duration is around 6.5, so will limit the changes in price as interest rates change, and that the bonds are BBB grade and higher.

I never quite liked the amount of corporate bonds (about 25%) since they tend to be more correlated to equities than government bonds.

If you only want one bond fund in your portfolio, this is probably good enough.

Whether you've pulled the trigger at the right time only time will tell.

GeoffTF

VAGS is a good fund and I hold some in my ISA. The corporate bonds are investment grade and should behave in much the same way as government bonds. Vanguard uses the (more expensive) OEIC version of the fund heavily in its Life Strategy and Target Retirement funds. Cash is paying high rates of interest at the moment, but the rates are expected to fall. Cash holders have already missed some of the party. It would have been better to switch from cash into bonds earlier, but better late than never.