Retirees Portfolio Revamp

masonic

aroominyork said:

masonic said:

It might be worth considering the major wealth preservation investment trusts for a slice: Personal Assets Trust and (although it's come of the boil a bit recently) Capital Gearing Trust. Particularly as interest rates fall and money market funds lose their shine.

It’s maybe worth expanding on this. If looking for a cash-like home for your money, a couple of options are money market funds like CSH2 and short duration nominal gilts. The former aims (and generally succeeds) to outperform SONIA, which is usually set 0.05% below the base rate; it does not price in anticipated movements in the base rate. Nominal gilts, however, do price in anticipated base rate changes. That means that when the base rate is rising, nominal gilts have the edge; when it is falling, as now, CSH2 is attractive. nb this does not take into account tax in unwrapped accounts, where CSH2 attracts CGT (other STMMFs are generally taxed at your marginal rate), while nominal gilts are not taxed on the capital gain.

Yes, and it is not just a choice between longer and short duration UK government bonds, there are also international, inflation linked, corporate, and low volatility equities that can be blended to achieve a steadier return. If defensives make up the majority of your portfolio, then diversification within that bucket becomes more important. As well as the interest rate trajectory, credit spreads, and inflation expectations factor in to the attractiveness of the relevant options at any particular time. Both of the funds mentioned are currently loaded up with inflation linked government bonds, but have started trimming back their holdings. Neither has been investing significantly in corporate bonds as credit spreads have been tight until the recent tariff yo-yoing.

There are of course passive multi-asset funds that cater for this, but quality within the low-risk end of these is harder to come by.

Bostonerimus1

Recent events have caused me to increase my cash allocation and move some US equities and bonds to global counterparts.

aroominyork

Bostonerimus1 said:

Recent events have caused me to increase my cash allocation and move some US equities and bonds to global counterparts.

Similar here. In late Feb/early March, ie before tariffgate, we reduced equities from 60% to 40% and the US part of our equities from 50% to 40%. Three reasons: thinking Trump might do bad things; moving into retirement (at least semi-); decent returns available on fixed interest. We are now 40% equities; 21% actively managed corporate bond funds (Man Dynamic Income & Sterling Corporate Bond); 9% global aggregate bond fund; 6% UK gilt fund; 24% quasi-cash (mostly CSH2, a little TG25). When interest rates reduce another c.0.5% I imagine we'll move some of the cash into the bond index funds. This change was mostly at OH's insistence, but I am comfortable with it and glad not to carry all the responsibility myself in these strange times.

P.S.  The OP asked about “lower risk, managed, global bond funds that produce reasonable monthly income”. Returns come with risk so it depends what you mean by ‘lower risk’. Man Sterling Corporate Bond fund distributes income monthly with a yield around 7% (and, over the last few years, a good amount of capital growth) but you would need to look at the credit quality to determine whether it meets your risk appetite (see https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00001CLQK&tab=3 ).

masonic

The Man fund is an interesting one. A yield of 7% is very nice when credit spreads are tight like now (BBB corporate - 10 year US Treasury < 2%), acknowledging the 10 year Treasury yield itself has spiked a little. Whereas BBB - US10y peaked at 6% during 2008 and 4% in 2020. The duration is not too bad (5.3, implying a 5% price reduction for each 1% widening of spread), so this might be one for the shopping list depending on how things unfold.

aroominyork

masonic said:

The Man fund is an interesting one. A yield of 7% is very nice when credit spreads are tight like now (BBB corporate - 10 year US Treasury < 2%), acknowledging the 10 year Treasury yield itself has spiked a little. Whereas BBB - US10y peaked at 6% during 2008 and 4% in 2020. The duration is not too bad (5.3, implying a 5% price reduction for each 1% widening of spread), so this might be one for the shopping list depending on how things unfold.

Does "depending on how things unfold" mean "if there isn't a global recession triggering multiple defaults"?

masonic

aroominyork said:

masonic said:

The Man fund is an interesting one. A yield of 7% is very nice when credit spreads are tight like now (BBB corporate - 10 year US Treasury < 2%), acknowledging the 10 year Treasury yield itself has spiked a little. Whereas BBB - US10y peaked at 6% during 2008 and 4% in 2020. The duration is not too bad (5.3, implying a 5% price reduction for each 1% widening of spread), so this might be one for the shopping list depending on how things unfold.

Does "depending on how things unfold" mean "if there isn't a global recession triggering multiple defaults"?

I'd be tempted to buy if it falls, say 20%, on fears of something like that. When spreads are tight as they are now, high quality credit is more attractive on a risk-adjusted basis.

chiang_mai

aroominyork said:

Bostonerimus1 said:

Recent events have caused me to increase my cash allocation and move some US equities and bonds to global counterparts.

Similar here. In late Feb/early March, ie before tariffgate, we reduced equities from 60% to 40% and the US part of our equities from 50% to 40%. Three reasons: thinking Trump might do bad things; moving into retirement (at least semi-); decent returns available on fixed interest. We are now 40% equities; 21% actively managed corporate bond funds (Man Dynamic Income & Sterling Corporate Bond); 9% global aggregate bond fund; 6% UK gilt fund; 24% quasi-cash (mostly CSH2, a little TG25). When interest rates reduce another c.0.5% I imagine we'll move some of the cash into the bond index funds. This change was mostly at OH's insistence, but I am comfortable with it and glad not to carry all the responsibility myself in these strange times.

P.S.  The OP asked about “lower risk, managed, global bond funds that produce reasonable monthly income”. Returns come with risk so it depends what you mean by ‘lower risk’. Man Sterling Corporate Bond fund distributes income monthly with a yield around 7% (and, over the last few years, a good amount of capital growth) but you would need to look at the credit quality to determine whether it meets your risk appetite (see https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00001CLQK&tab=3 ).

Thank you for mentioning it, I've looked at the Man bond fund but its credit profile is below what I would consider to be, lower risk, one of the few areas of bonds that I do understand a little. The L&G Strategic Bond continues to sit well with me, the average credit being more robust.

Thank you also to Masonic for mentioning CSH2, a useful addition to the MM library.

One of the changes I will make is to cover off the US markets with a single index tracker and spend the rest of my energy looking at opportunities elsewhere. That has the benefit of being able to control and limit the extent of my US holdings, without impacting other geographies. The Fidelity Global Dividend income is perhaps the one exception but with a US element of 27%, it's acceptably low.

Regarding the UK: I've been going back and forth between an iShares Core FTSE100 ETF and the managed L&G Smartgarp UK.....managed vs passive, monthly income vs annual dividend, index vs selection, UK vs UK + other geographies. 've finally come down on the side of the ETF on the basis of liquidity although this might be at the expense of increased volatility. I'm still smarting from the falling elevator ride that was a global index tracker! Anyone?

aroominyork

chiang_mai said:

aroominyork said:

Bostonerimus1 said:

Recent events have caused me to increase my cash allocation and move some US equities and bonds to global counterparts.

Similar here. In late Feb/early March, ie before tariffgate, we reduced equities from 60% to 40% and the US part of our equities from 50% to 40%. Three reasons: thinking Trump might do bad things; moving into retirement (at least semi-); decent returns available on fixed interest. We are now 40% equities; 21% actively managed corporate bond funds (Man Dynamic Income & Sterling Corporate Bond); 9% global aggregate bond fund; 6% UK gilt fund; 24% quasi-cash (mostly CSH2, a little TG25). When interest rates reduce another c.0.5% I imagine we'll move some of the cash into the bond index funds. This change was mostly at OH's insistence, but I am comfortable with it and glad not to carry all the responsibility myself in these strange times.

P.S.  The OP asked about “lower risk, managed, global bond funds that produce reasonable monthly income”. Returns come with risk so it depends what you mean by ‘lower risk’. Man Sterling Corporate Bond fund distributes income monthly with a yield around 7% (and, over the last few years, a good amount of capital growth) but you would need to look at the credit quality to determine whether it meets your risk appetite (see https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00001CLQK&tab=3 ).

Thank you for mentioning it, I've looked at the Man bond fund but its credit profile is below what I would consider to be, lower risk, one of the few areas of bonds that I do understand a little. The L&G Strategic Bond continues to sit well with me, the average credit being more robust.

The Man fund is investment grade, holding "at least 80% of its Net Asset Value in investment grade securities". The L&G fund includes nearly 50% junk bonds (sub BBB). Why do think its credit is more robust?

aroominyork

masonic said:

aroominyork said:

masonic said:

The Man fund is an interesting one. A yield of 7% is very nice when credit spreads are tight like now (BBB corporate - 10 year US Treasury < 2%), acknowledging the 10 year Treasury yield itself has spiked a little. Whereas BBB - US10y peaked at 6% during 2008 and 4% in 2020. The duration is not too bad (5.3, implying a 5% price reduction for each 1% widening of spread), so this might be one for the shopping list depending on how things unfold.

Does "depending on how things unfold" mean "if there isn't a global recession triggering multiple defaults"?

I'd be tempted to buy if it falls, say 20%, on fears of something like that. When spreads are tight as they are now, high quality credit is more attractive on a risk-adjusted basis.

That’s interesting. Is your view that when the economy is strong, defaults are low so high quality credit does not need to offer much of a premium over government debt, hence tight spreads? And when the economy weakens, the likelihood of defaults increases so corporates need to offer a meaningful premium… and that is when talented managers can identify good risk-adjusted opportunities in corporate debt? If so, why do you discount its consistent outperformance against an index fund (see below, since its launch) while spreads are tight?

masonic

aroominyork said:

masonic said:

aroominyork said:

masonic said:

The Man fund is an interesting one. A yield of 7% is very nice when credit spreads are tight like now (BBB corporate - 10 year US Treasury < 2%), acknowledging the 10 year Treasury yield itself has spiked a little. Whereas BBB - US10y peaked at 6% during 2008 and 4% in 2020. The duration is not too bad (5.3, implying a 5% price reduction for each 1% widening of spread), so this might be one for the shopping list depending on how things unfold.

Does "depending on how things unfold" mean "if there isn't a global recession triggering multiple defaults"?

I'd be tempted to buy if it falls, say 20%, on fears of something like that. When spreads are tight as they are now, high quality credit is more attractive on a risk-adjusted basis.

That’s interesting. Is your view that when the economy is strong, defaults are low so high quality credit does not need to offer much of a premium over government debt, hence tight spreads? And when the economy weakens, the likelihood of defaults increases so corporates need to offer a meaningful premium… and that is when talented managers can identify good risk-adjusted opportunities in corporate debt? If so, why do you discount its performance (see below, since launch) when spreads are tight?

It's not really a view that it will perform badly when the economy does well. We've discussed the surprising past performance of the fund before.

My rationale is that in an efficient market, a bond is priced such that its yield is proportional to its risk of default. A very low credit spread like we see today is the market saying everything is great and these BBB rated bonds are almost as safe as holding government debt.

If the market changes its mind and starts to fear that a recession is a possibility, then it is going to start demanding a higher yield for that higher risk credit. Credit spreads will widen, and consequently prices will fall. Given equities have already been beaten down somewhat, the falls from a fund like the Man fund could be similar initially (this presents a buying opportunity), but it would later be buoyed by inevitable cuts to interest rates, so overall its yield may end up not far from where it began.

So I see it as more attractive to hold govt debt in the lead up to a recession, and taking on more credit risk after the market (over)reacts to the unfolding events. An active fund can (maybe) help avoid the bigger default risks while the market is pricing indiscriminately.

In 2020, I just managed to liquidate my P2P portfolio, get it into iWeb and load up on NCYF before markets turned. Though that was an unusually quick recovery given how substantial the preceding crash was. The loss potential for a GFC or Dotcom style crash would be greater.