Help please in selecting a bond fund?

incus432

InvesterJones said:

Any you can hold bond funds in tax wrappers if CGT (or income) is a tax concern.

Increasingly true for individual bonds too, in ISAs or SIPPs.

InvesterJones

incus432 said:

InvesterJones said:

Any you can hold bond funds in tax wrappers if CGT (or income) is a tax concern.

Increasingly true for individual bonds too, in ISAs or SIPPs.

Yes of course, but that's independent of negating CGT/income tax otherwise due on bond funds.

incus432

Exactly. So the tax issue is not a reason to prefer bond funds

InvesterJones

incus432 said:

Exactly. So the tax issue is not a reason to prefer bond funds

Quite, I don't think anyone would suggest otherwise.

incus432

InvesterJones said:

Oh I think there are still reasons you might want a bond fund (or several) - the most obvious one is availability: not all platforms offer the chance to buy bonds directly, and those that do often have limited selection (for example UK only). If you want to hold Emerging Market etc, a bond fund is pretty much the only way to go. Then there's the reason funds exist in the first place: convenience - a manager is doing/setting up the buying and selling, you only need concern yourself with entry and exit - this is especially relevant for ultra short duration bonds, or where a particular risk level is being targetted. Funds may end up with lower costs too than are possible with individual purchases. Any you can hold bond funds in tax wrappers if CGT (or income) is a tax concern.

Ok, sorry. I thought that was one of your arguments for bond funds over bonds above

InvesterJones

incus432 said:

InvesterJones said:

Oh I think there are still reasons you might want a bond fund (or several) - the most obvious one is availability: not all platforms offer the chance to buy bonds directly, and those that do often have limited selection (for example UK only). If you want to hold Emerging Market etc, a bond fund is pretty much the only way to go. Then there's the reason funds exist in the first place: convenience - a manager is doing/setting up the buying and selling, you only need concern yourself with entry and exit - this is especially relevant for ultra short duration bonds, or where a particular risk level is being targetted. Funds may end up with lower costs too than are possible with individual purchases. Any you can hold bond funds in tax wrappers if CGT (or income) is a tax concern.

Ok, sorry. I thought that was one of your arguments for bond funds over bonds above

I see, no, I was just meaning that tax isn't a deciding factor either way if you can hold in an ISA or SIPP.

OldScientist

itwasntme001 said:

OldScientist said:

itwasntme001 said:

InvesterJones said:

itwasntme001 said:

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.

Completely agreed - just because you /can/ hold a bond to maturity, doesn't mean you /have/ to if selling is right for you and you want to take advantage of a price rise.

Plus holding individual gilts is more tax efficient because the capital gians are tax free.  Not for bond funds however.

I can not see any reason to hold bond funds, either seperatly or as part of a multi-asset fund.  I suppose if you are clueless about holding individual bonds it might come of use.  But bond funds are usually of fixed maturities or duration so if one needs to meet a liabiltiy, they would actively need to sell down the bond fund at an appripriate time, and the price you get can be inappropriate.  With a gilt held till maturity at the time you intend to spend it, you do not have to worry about this.

Two possible reasons for holding funds:
1) Global bond funds offer international diversification in fixed income (useful in the unlikely event of UK default)

2) Many pension platforms do not allow individual gilts to be held.

I have a DB pension in payment that effectively consists of inflation linked gilts, so holding global bond funds (including cash accounts, my fixed income holdings have a weighted duration of less than 2 years) allows me to diversify away from the UK. I also hold individual inflation linked gilts in a collapsing ladder (to provide an element of inflation protected income to supplement a nominal life insurance payout in the event of my death before my OH gets their SP).

I note that multiple bond funds of different durations can be used to duration match a collapsing ladder (there has been a lot of discussion and modelling of this over on the bogleheads forums), although there are some limitations (e.g., with non-parallel shifts in the yield curve). Indeed, some 'lifestyle' pension funds intended for annuity purchase (rather than drawdown) use long bonds to match the duration of the annuity.

Do the gilts you hold solely form part of a liability matching portfolio?

Yes I solely use gilts for liability matching.  Which is also why I just stick to gilts and nothing foreign.  I believe cash/gilts should onyl be used to meet your liabilities and you need a certainty in payoff.  I invest the rest in equities that is not needed for say 15 years.

With certain exceptions (e.g. Truss 2022) I do not believe it is worth trading bonds as the market is just too efficient most of the time.

For liability matching with a collapsing (non-rolling) ladder, i.e., no reinvestment of coupons or proceeds from maturing bonds, then I would completely agree that this makes good use of the properties of individual bonds (with the caveat that two or bond funds of different durations can also be used to duration match to a collapsing ladder).

However, in accumulation (certainly well before retirement) there are no liabilities to match, so a bond fund (as opposed to a rolling ladder of individual bonds) to reduce volatility might be a suitable investment for those who do not want to go 100% equities provided that the duration of the fund is less than roughly the time before withdrawals (or perhaps, more accurately, half the time). Even in retirement, an intermediate duration bond fund (say 3 to 6 years) is likely to be good enough over the long term in the risk part of a portfolio (i.e., outside of the income floor).

For those interesting in reading more about funds vs individual bonds (in rolling ladders), there are interesting articles at

https://advisors.vanguard.com/content/dam/fas/pdfs/FAIBVBF.pdf
and
https://www.advisorperspectives.com/articles/2023/03/27/the-dilemma-that-isnt-bonds-versus-bond-funds

OldScientist said:

2) Many pension platforms do not allow individual gilts to be held.

Perhaps but AJ Bell do. and both they and Iweb allow them in an ISA

I agree that some do (I hold individual gilts on iweb, although fidelity and vanguard do not allow them unless the former have changed since I left). However, many platforms used for workplace pensions do not allow a wide range of holdings. I do not have any statistics on this, but in a very small sample of three different platforms, each only allows funds).

itwasntme001

OldScientist said:

itwasntme001 said:

OldScientist said:

itwasntme001 said:

InvesterJones said:

itwasntme001 said:

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.

Completely agreed - just because you /can/ hold a bond to maturity, doesn't mean you /have/ to if selling is right for you and you want to take advantage of a price rise.

Plus holding individual gilts is more tax efficient because the capital gians are tax free.  Not for bond funds however.

I can not see any reason to hold bond funds, either seperatly or as part of a multi-asset fund.  I suppose if you are clueless about holding individual bonds it might come of use.  But bond funds are usually of fixed maturities or duration so if one needs to meet a liabiltiy, they would actively need to sell down the bond fund at an appripriate time, and the price you get can be inappropriate.  With a gilt held till maturity at the time you intend to spend it, you do not have to worry about this.

Two possible reasons for holding funds:
1) Global bond funds offer international diversification in fixed income (useful in the unlikely event of UK default)

2) Many pension platforms do not allow individual gilts to be held.

I have a DB pension in payment that effectively consists of inflation linked gilts, so holding global bond funds (including cash accounts, my fixed income holdings have a weighted duration of less than 2 years) allows me to diversify away from the UK. I also hold individual inflation linked gilts in a collapsing ladder (to provide an element of inflation protected income to supplement a nominal life insurance payout in the event of my death before my OH gets their SP).

I note that multiple bond funds of different durations can be used to duration match a collapsing ladder (there has been a lot of discussion and modelling of this over on the bogleheads forums), although there are some limitations (e.g., with non-parallel shifts in the yield curve). Indeed, some 'lifestyle' pension funds intended for annuity purchase (rather than drawdown) use long bonds to match the duration of the annuity.

Do the gilts you hold solely form part of a liability matching portfolio?

Yes I solely use gilts for liability matching.  Which is also why I just stick to gilts and nothing foreign.  I believe cash/gilts should onyl be used to meet your liabilities and you need a certainty in payoff.  I invest the rest in equities that is not needed for say 15 years.

With certain exceptions (e.g. Truss 2022) I do not believe it is worth trading bonds as the market is just too efficient most of the time.

For liability matching with a collapsing (non-rolling) ladder, i.e., no reinvestment of coupons or proceeds from maturing bonds, then I would completely agree that this makes good use of the properties of individual bonds (with the caveat that two or bond funds of different durations can also be used to duration match to a collapsing ladder).

However, in accumulation (certainly well before retirement) there are no liabilities to match, so a bond fund (as opposed to a rolling ladder of individual bonds) to reduce volatility might be a suitable investment for those who do not want to go 100% equities provided that the duration of the fund is less than roughly the time before withdrawals (or perhaps, more accurately, half the time). Even in retirement, an intermediate duration bond fund (say 3 to 6 years) is likely to be good enough over the long term in the risk part of a portfolio (i.e., outside of the income floor).

For those interesting in reading more about funds vs individual bonds (in rolling ladders), there are interesting articles at

https://advisors.vanguard.com/content/dam/fas/pdfs/FAIBVBF.pdf
and
https://www.advisorperspectives.com/articles/2023/03/27/the-dilemma-that-isnt-bonds-versus-bond-funds

OldScientist said:

2) Many pension platforms do not allow individual gilts to be held.

Perhaps but AJ Bell do. and both they and Iweb allow them in an ISA

I agree that some do (I hold individual gilts on iweb, although fidelity and vanguard do not allow them unless the former have changed since I left). However, many platforms used for workplace pensions do not allow a wide range of holdings. I do not have any statistics on this, but in a very small sample of three different platforms, each only allows funds).

I just do not see the point fo bond funds for me personally.  I understand how bonds works, my platform enables me to buy direct gilts and direct gitls are a lot more tax efficient than bond funds given I hold them in a GIA.  Also no fees to pay.

If you want to reduce volatility while in accumulation, you have to ask why.  Far better to think in terms of money you need short-medium term, and money you need long term.  For long temr money invest in equities.  For short.medium term, buy bonds.  Keep the pots separate.  Avoid multi-asset.  I do not understand why people prefer multi-asset, is it because they see just one number that goes up and down less?  It is purely psychological, and this can be overcome.

incus432

itwasntme001 said:

I just do not see the point fo bond funds for me personally.  I understand how bonds works, my platform enables me to buy direct gilts and direct gitls are a lot more tax efficient than bond funds given I hold them in a GIA.  Also no fees to pay.

If you want to reduce volatility while in accumulation, you have to ask why.  Far better to think in terms of money you need short-medium term, and money you need long term.  For long temr money invest in equities.  For short.medium term, buy bonds.  Keep the pots separate.  Avoid multi-asset.  I do not understand why people prefer multi-asset, is it because they see just one number that goes up and down less?  It is purely psychological, and this can be overcome.

Agreed on both points. I view multi-asset as a cynical marketing ploy

itwasntme001

incus432 said:

itwasntme001 said:

I just do not see the point fo bond funds for me personally.  I understand how bonds works, my platform enables me to buy direct gilts and direct gitls are a lot more tax efficient than bond funds given I hold them in a GIA.  Also no fees to pay.

If you want to reduce volatility while in accumulation, you have to ask why.  Far better to think in terms of money you need short-medium term, and money you need long term.  For long temr money invest in equities.  For short.medium term, buy bonds.  Keep the pots separate.  Avoid multi-asset.  I do not understand why people prefer multi-asset, is it because they see just one number that goes up and down less?  It is purely psychological, and this can be overcome.

Agreed on both points. I view multi-asset as a cynical marketing ploy

I did not read the whole of the Vangaurd marketing posted by OldScientist, but just looking at the comparison between bonds and bond funds, i find it interesting they think bond funds have lower fees!

I suppose you can not get more biased than that.