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

aroominyork

GeoffTF said:

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.

Not necessarily - it depends when you arrived at the party. If you arrived 18 months ago you would have seen the OEIC or VAGS rise 5% since then and would wish you'd stayed in cash. 

GazzaBloom

When I run a comparison via cashflow modelling there isn't a huge difference to range of outcomes over the long term between holding 20% in STMMF/Cash vs VAGS when rebalanced annually. VAGS comes out slightly ahead.

GeoffTF

VAGS been going up since May, and has shot up in the recent global equity mini-crash. It is very evident that gilt yields have gone down in recent months. "Nobody rings a bell at the bottom" as they say. All you can do is the spread your risk.

aroominyork

GeoffTF said:

VAGS been going up since May, and has shot up in the recent global equity mini-crash. It is very evident that gilt yields have gone down in recent months. "Nobody rings a bell at the bottom" as they say. All you can do is the spread your risk.

VAGS had a strong run in the last quarter of 2023 - curious you don't mention that - and although VAGS has risen a couple of percent in the last fortnight, there has been no mini-crash... just a couple of single day dips with a global tracker now sitting 0.5% below where it was a fortnight ago. I think you are looking for patterns on quite weak evidence. 

masonic

The underlying question here is really one of correlation. Can bonds now be relied upon to go up in price when equities crash? Bonds going up on price is not a good thing for future returns from bonds. It is the pulling of cashflows forward. It happens due to the expectation that interest rates will be driven lower than previous market expectations. If you are going to hold a bond fund long term, then it is a slightly negative outcome. However, it is a good thing if you want to reduce the volatility within your overall portfolio. What we saw on Friday was a single day where some news was released that markets really did not like (well in fact there was both the US jobs report and the Bank of Japan raising rates). This news caused an immediate reaction in bond and equity markets that sent them in opposite directions. But this is a single event, and I wouldn't be too quick to draw a generalised conclusion from this.

masonic

GazzaBloom said:

When I run a comparison via cashflow modelling there isn't a huge difference to range of outcomes over the long term between holding 20% in STMMF/Cash vs VAGS when rebalanced annually. VAGS comes out slightly ahead.

This shouldn't come as much of a surprise. The difference between 80:20 and 100:0 is not very significant, as these compound annual growth rate charts of the biggest drawdowns in living memory demonstrate:

80% S&P500 / 20% UK cash

80% S&P500 / 20% Global bonds

100% S&P500

OldScientist

masonic said:

The underlying question here is really one of correlation. Can bonds now be relied upon to go up in price when equities crash? Bonds going up on price is not a good thing for future returns from bonds. It is the pulling of cashflows forward. It happens due to the expectation that interest rates will be driven lower than previous market expectations. If you are going to hold a bond fund long term, then it is a slightly negative outcome. However, it is a good thing if you want to reduce the volatility within your overall portfolio. What we saw on Friday was a single day where some news was released that markets really did not like (well in fact there was both the US jobs report and the Bank of Japan raising rates). This news caused an immediate reaction in bond and equity markets that sent them in opposite directions. But this is a single event, and I wouldn't be too quick to draw a generalised conclusion from this.

I'd agree with the correlation aspect - although I note that from US results (e.g., https://www.kitces.com/blog/stocks-for-the-long-run-siegal-mcquarrie-portfolio-investment-bonds-asset) the correlations between equities and bonds over long periods of 120 years or more (depending on the period looked at) range from about zero to small positive numbers or over shorter (20 year periods) they vary from -0.7 to 0.9. In other words, when equity prices go down, bond prices could go down, go up, or stay the same (i.e. do anything!). Only two of those outcomes might be useful to retired investors (and a different two for accumulators).

From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

masonic

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

aroominyork

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Would you please explain that last sentence, masonic?

masonic

aroominyork said:

masonic said:

OldScientist said:
From the point of view of reducing volatility, the duration of the bond fund is critical. One of the problems with the 'All stocks' index of UK gilts is that the modified duration is currently about 8 (it was nearly 13 in 2020, was as low as 5 in 1990 and 16 in 1950) which still leaves it fairly sensitive to changes in interest rates. With a modified duration of 6.5, the global bond fund under discussion here is currently slightly less sensitive, while the short version of the same fund is less sensitive still. Of course, in the long term, the returns will tend to be higher for longer duration, but, in retirement, it is not just returns that are important but their sequence.

This is a good point and the duration can be either good or bad depending on what you want from the exposure. As has been discussed at length elsewhere, you can opt for a ladder of individual gilts to get the benefit of duration on returns without the uncertainty. This could be done in addition to holding a fund. Having different buckets fulfilling different purposes can assist with portfolio management during adverse sequence of returns scenarios. Especially considering that beyond the early years the argument for holding significant defensive assets weakens.

Would you please explain that last sentence, masonic?

It is a major drop in the early years of retirement that is most damaging to an individual's retirement outcome. Consider an unlucky retiree who starts retirement on the eve of a major crash that knocks their portfolio down in value at the outset. Experiencing the worst performing years up front means that more money is drawn down at lower valuations and the portfolio will be drained more quickly. However, if the worst performing years occur later in retirement, they will be in a better position to ride it out. Their portfolio will no longer need to last as long, so withdrawals at lower valuations at this stage will be more sustainable. There is also a tendency for spending to decline in the later years. In short, the retiree who faces an equivalent decline earlier in retirement will run out of money sooner than the one who faces it later in retirement, even if the two retirees experience identical compound returns over their retirement period.