Help please in selecting a bond fund?

TUVOK

I have neither the time nor knowledge to buy individual UK/USA  bonds, wish I did as it seems a fascinating area.
So I'm looking for a safe fund which deals with these investments, I'm not looking for funds which reach for the stars in the matter of returns, just a safe fund which gives a reasonable return, and provides some insurance against market crashes.
Thanks for any/all replies. 

OldScientist

TUVOK said:

I have neither the time nor knowledge to buy individual UK/USA  bonds, wish I did as it seems a fascinating area.
So I'm looking for a safe fund which deals with these investments, I'm not looking for funds which reach for the stars in the matter of returns, just a safe fund which gives a reasonable return, and provides some insurance against market crashes.
Thanks for any/all replies. 

Fund duration is probably what you need to look at. Typically, over the long term, short duration funds will have lower returns but lower volatility than longer duration funds.

If you are looking at global bond index funds, then

Vanguard global bond (https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F000003VEC ) has an effective duration of 6.5 (which means a 1 percentage point change in yields will lead to a 6.5 percentage point change in NAV)

Vanguard global short bond (https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SK60 ) has an effective duration of 2.7 (so less volatile to yield changes)

Other fund houses (e.g., ishares) offer similar funds.

For the UK,

ishares UK gilts all stocks fund (https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000OJRW ) has an effective duration of 8.1 (so is likely to be more volatile than the global bond)

ishares uk gilts 0 to 5 years (IGL5) has a duration of 2.2. ishares also offer a 0 to 10 year fund with a longer duration.

The first of these is offered by many fund houses, the latter by a smaller number.

If you want little or no nominal volatility at all, then MMFs (e.g., CHS2, although many other fund houses offer STMMFs) may be a suitable alternative, but are likely to result in lower returns over the long term.

incus432

TUVOK said:

I have neither the time nor knowledge to buy individual UK/USA  bonds, wish I did as it seems a fascinating area.
So I'm looking for a safe fund which deals with these investments, I'm not looking for funds which reach for the stars in the matter of returns, just a safe fund which gives a reasonable return, and provides some insurance against market crashes.
Thanks for any/all replies. 

Holding bond funds is not at all comparable with holding individual bonds to maturity.  Funds are subject to crashes just like equities. Just check recent history

https://www.morningstar.com/funds/why-2022-has-been-such-terrible-year-bond-funds

https://www.ft.com/content/4e6b89a3-a63e-49df-8a04-0488b69e84f5

OldScientist

incus432 said:

TUVOK said:

I have neither the time nor knowledge to buy individual UK/USA  bonds, wish I did as it seems a fascinating area.
So I'm looking for a safe fund which deals with these investments, I'm not looking for funds which reach for the stars in the matter of returns, just a safe fund which gives a reasonable return, and provides some insurance against market crashes.
Thanks for any/all replies. 

Holding bond funds is not at all comparable with holding individual bonds to maturity.  Funds are subject to crashes just like equities. Just check recent history

https://www.morningstar.com/funds/why-2022-has-been-such-terrible-year-bond-funds

https://www.ft.com/content/4e6b89a3-a63e-49df-8a04-0488b69e84f5

Depending on whether you are accumulating (when maturing bonds will be reinvested in new bonds, i.e., similar to a bond fund) or in retirement and you have your bonds in a collapsing (i.e., non-rolling) ladder and spend the maturing bonds and coupons.

incus432

Point was that if you hold a bond/gilt to maturity you get the face value back but bond funds don't work that way and you can lose a lot of money.

leosayer

incus432 said:

Point was that if you hold a bond/gilt to maturity you get the face value back but bond funds don't work that way and you can lose a lot of money.

That's not really the whole story. If the prices of bond funds goes down that's because the market price of the bonds held by the fund has gone down.

Just because you hold a bond to maturity doesn't mean you can't make a loss. Weren't gilts yields below zero some years back?

incus432

That's not really the whole story. If the prices of bond funds goes down that's because the market price of the bonds held by the fund has gone down.

Just because you hold a bond to maturity doesn't mean you can't make a loss. Weren't gilts yields below zero some years back?

As I understand it if you buy a gilt and hold it to maturity you know exactly what you will get back and when. The YTM is published eg. https://www.yieldgimp.com. You can only make a loss if inflation is above the YTM. After your purchase market prices are irrelevant if you hold to maturity. Please do explain if you think this is incorrect.

In 2020 the UK government did sell a three-year gilt with a fractionally negative yield of -0.003%, but those who bought it knew they were going to make a loss. (Why is another story)

Linton

leosayer said:

incus432 said:

Point was that if you hold a bond/gilt to maturity you get the face value back but bond funds don't work that way and you can lose a lot of money.

That's not really the whole story. If the prices of bond funds goes down that's because the market price of the bonds held by the fund has gone down.

Just because you hold a bond to maturity doesn't mean you can't make a loss. Weren't gilts yields below zero some years back?

When you buy a fixed bond you know exactly what your return will be when it matures, no matter what happens in the meantime.  If you knew the bond was going to make a loss, but did not want it to, why would you buy it?  Almost all   bond buyers in the market would make the same calculation and so the price would fall, making the bond profitable. 

For IL bonds the basic theory is the same but the loss/gain at maturity is relative to RPI. 

The problem with bond funds is that when you sell most of the underlying bonds will not be at maturity and so you dont benefit from their known fixed value at maturity.

incus432

Linton said:

The problem with bond funds is that when you sell most of the underlying bonds will not be at maturity and so you dont benefit from their known fixed value at maturity.

Thank you. I think it's a common misunderstanding about bond funds (and I was caught out too)

Prism

The opposing argument is that if you only sell individual bonds at maturity then you don't benefit from prices rises that might occur along the way. One of the arguments of holding a bond fund isn't that you know exactly what you are going to get, or that its immune to losses, but that it might well give you some decent gains when you really need them.

itwasntme001

Prism said:

The opposing argument is that if you only sell individual bonds at maturity then you don't benefit from prices rises that might occur along the way. One of the arguments of holding a bond fund isn't that you know exactly what you are going to get, or that its immune to losses, but that it might well give you some decent gains when you really need them.

But you can do the same with holding a bond directly.