Bond fund yields

Linton

BobR64 said:

OldScientist said:

2) In a rolling bond ladder the proceeds from maturing gilts and coupons are reinvested in further gilts and is functionally the same as a bond fund with the same weighted duration. Differences lie in fees (transaction fees and bid-ask spreads for the ladder vs fund fees for the fund), taxation when held in a GIA, and, potentially, a difference in how proceeds are reinvested across maturities. I note that the FTSE 'all stocks', 'under 5 years', and 'under 10 years' indices (and funds that follow these indices) all hold gilts until maturity. The MSCI indices (and, AFAIK, virtually all US and international bond indices) tend to have a low maturity cutoff of 1 year.

Apologies for resurrecting an old thread but this caught my eye while searching for something and is of interest to me.

One of the things I have been feeling a bit paralysed about is how to hold some bonds for the longer term in my pension.  One sees a lot of comments about how unpredictable bond funds are compared with holding individual gilts held to maturity. I know that I could create a rolling gilt ladder but it is the long term maintenance that puts me off, and that is why I would really like to be convinced that a fund would work.

It seems from what you are saying that any fund that tracks one of these FTSE indices would be pretty much equivalent to a rolling ladder. I think this is the first time I have seen anyone point out that these indices involve holding to maturity. I haven't been able to find anywhere to confirm this, though, which is no doubt a reflection of my own ignorance and search abilities. Where would I look to be able to read about this sort of detail?

A gilt fund would not be equivalent to a rolling gilt ladder under all circumstances...

The problems is this: when you buy an individual gilt you know the price at which you bought, you know exactly the interest you will be receiving and you know exactly how much will be returned at maturity.  Between these two fixed points the price can vary significantly.

The longer the term of the bond the more the variability - a bond which matures in 1 year is not going to be priced very differently to £100.  A bond which matures in say 50 years could be worth double or half its value at maturity.after 25 years.  A UK gilt fund will hold a wide variety of gilts of different maturity dates.  So when you sell a bond fund you lose the benefit of the known fixed price at maturity. 

If you are holding the gilts in order to provide guaranteed future tranches of lump sum income certainty of return could well be very important and so individual gilts would be advantageous.

On the other hand, you could be holding gilts as a diversification for your mainly equity long term growth portfolio.  Here price variability becomes far less important or even possibly helpful if the gilt prices are anti-correlated to equity prices.  If variability of price was a real concern you would not be holding most of your investmenst as equity. So a gilt fund with its much reduced management effort could be preferable.
 

leosayer

Indexes will only include bonds to maturity if required to meet the index criteria.

For example, "FTSE Actuaries UK Conventional Gilts 5-15 Years" won't hold to maturity but "FTSE Actuaries UK Conventional Gilts up to 10 Years" will.

An example of a methodology for inclusion can be found here (good luck, it's dense!):
https://www.lseg.com/content/dam/ftse-russell/en_us/documents/ground-rules/ftse-actuaries-uk-gilts-index-series-ground-rules.pdf

You can normally find a shortened version of that on fund documents that use the index.

BobR64

Linton said:

On the other hand, you could be holding gilts as a diversification for your mainly equity long term growth portfolio.  Here price variability becomes far less important or even possibly helpful if the gilt prices are anti-correlated to equity prices.  If variability of price was a real concern you would not be holding most of your investmenst as equity. So a gilt fund with its much reduced management effort could be preferable.

 

Thanks @Linton. I think this best matches what I am looking for rather than the future income case (I already hold some gilts for that and they are much easier for me to get my head around!).

leosayer said:

...
An example of a methodology for inclusion can be found here (good luck, it's dense!):
https://www.lseg.com/content/dam/ftse-russell/en_us/documents/ground-rules/ftse-actuaries-uk-gilts-index-series-ground-rules.pdf
...

Thanks @leosayer. After posting earlier, I had another search and managed to find a document that I suspect was this one. As you say, it is dense but I think I managed to pick out the bit I was looking for. 

OldScientist

Linton said:

BobR64 said:

OldScientist said:

2) In a rolling bond ladder the proceeds from maturing gilts and coupons are reinvested in further gilts and is functionally the same as a bond fund with the same weighted duration. Differences lie in fees (transaction fees and bid-ask spreads for the ladder vs fund fees for the fund), taxation when held in a GIA, and, potentially, a difference in how proceeds are reinvested across maturities. I note that the FTSE 'all stocks', 'under 5 years', and 'under 10 years' indices (and funds that follow these indices) all hold gilts until maturity. The MSCI indices (and, AFAIK, virtually all US and international bond indices) tend to have a low maturity cutoff of 1 year.

Apologies for resurrecting an old thread but this caught my eye while searching for something and is of interest to me.

One of the things I have been feeling a bit paralysed about is how to hold some bonds for the longer term in my pension.  One sees a lot of comments about how unpredictable bond funds are compared with holding individual gilts held to maturity. I know that I could create a rolling gilt ladder but it is the long term maintenance that puts me off, and that is why I would really like to be convinced that a fund would work.

It seems from what you are saying that any fund that tracks one of these FTSE indices would be pretty much equivalent to a rolling ladder. I think this is the first time I have seen anyone point out that these indices involve holding to maturity. I haven't been able to find anywhere to confirm this, though, which is no doubt a reflection of my own ignorance and search abilities. Where would I look to be able to read about this sort of detail?

A gilt fund would not be equivalent to a rolling gilt ladder under all circumstances...

The problems is this: when you buy an individual gilt you know the price at which you bought, you know exactly the interest you will be receiving and you know exactly how much will be returned at maturity.  Between these two fixed points the price can vary significantly.

The longer the term of the bond the more the variability - a bond which matures in 1 year is not going to be priced very differently to £100.  A bond which matures in say 50 years could be worth double or half its value at maturity.after 25 years.  A UK gilt fund will hold a wide variety of gilts of different maturity dates.  So when you sell a bond fund you lose the benefit of the known fixed price at maturity. 

If you are holding the gilts in order to provide guaranteed future tranches of lump sum income certainty of return could well be very important and so individual gilts would be advantageous.

On the other hand, you could be holding gilts as a diversification for your mainly equity long term growth portfolio.  Here price variability becomes far less important or even possibly helpful if the gilt prices are anti-correlated to equity prices.  If variability of price was a real concern you would not be holding most of your investmenst as equity. So a gilt fund with its much reduced management effort could be preferable.
 

Where money is not withdrawn, a rolling gilt ladder and fund that have the same range of maturities will be functionally equivalent.

To take an example, comparing the under 5 year gilts to a 5 year rolling ladder,
1) each will contain gilts between 0 and 5 years.
2) each will use the proceeds from maturing gilts and coupons (and any new money) to purchase new gilts.

In the real world with point 1, there will be a difference in the weightings of gilts held (the fund will hold gilts proportional to the issue weight) and in point 2, in the ladder the proceeds will (probably) be invested in the highest maturity gilt, whereas in the fund, the proceeds will be distributed so as to keep the holdings in proportion to issue weight.

With withdrawals (particularly beyond the natural yield), the performance of the rolling ladder can be better.

fizio

I am just getting into researching bonds for diversification from 100% equities and the reply from @Linton thats been very useful in terms of funds versus bond ladders (as already echo'd) was

On the other hand, you could be holding gilts as a diversification for your mainly equity long term growth portfolio.  Here price variability becomes far less important or even possibly helpful if the gilt prices are anti-correlated to equity prices.  If variability of price was a real concern you would not be holding most of your investmenst as equity. So a gilt fund with its much reduced management effort could be preferable.

This may well save me doing lots of extra research on bond ladders....