A few questions about bond funds & gilts

Pizzapie0000

Hi

I have several questions about bonds / bond funds; I am a novice so please bare with me:

I am 46 and I am aiming to retire at 60. I currently have £260k in my employer's pension scheme and I am contributing £1200 per month, about 30% of my salary. I didn't take pensions seriously until 10 years ago, so I am trying to catch up by paying extra.

1. My fund is in a 75%-25% allocation, with 75% in a world tracker and 25% in corporate bonds, property equity and REITS, and alternative investments. This is the default investment portfolio at my company. 

At what age do I need to start thinking about derisking, and moving to a more conservative portfolio, and what sort of portfolio would this look like? 

Ive read a lot about bond ladders, is this something I should be looking at creating now for when I retire.

2. I have about £100k in my ISA, and the allocations are a mess:

world tracker: 38%

FTSE 100 - 1%

Devloped work tracker hedged to £ 25%

VUSA- 6%

S&P Tech Fund XLKQ- 2%

Google, Amazon, Facebook, Tesla - all add up to 1% because the tech eft doesn't include them.
DAGB and Microstrategy- 1% for crypto 

Gold eft 5%

Vanguard UK Governement Bond Fund: 5% 
Ishares US Treasury Bond eft 7-10 yes - 5%

Royal London Government Bond Fund:3%

Money Market: 7%

I am trying to create a bond fund to counterbalance by equities but the bond funds haven't done much during the past 3 years I've had them. 

They've returned 1-2% , a fixed term account would have been better.
I don't want to be 100% equities because I couldnt stomach a 30-40% loss, so I need something else in my portfolio.

Any suggestion about a counterbalance to equities?

I was thinking of buying £10k of gilts that mature in 5 years instead of messing around with bond funds.

Thanks for any advice.

masonic

What do you intend to do when you retire at 60? If the plan is to use a lot of the money to buy an annuity, then derisking that would be more of a priority. Otherwise, a large part of your portfolio is likely to remain invested well beyond that date and would not need derisking prior. Does your pension default fund already have lifestyling built into the fund? Many do.

The pension is already more than 2.5x the ISA, and presumably you are paying more into it going forward. So are you planning to generate enough income from the pension to use up your personal allowance and tax free 25%, then supplement from the ISA?

You currently have 20% bonds and 5% gold in the ISA. Perhaps you do not need to derisk any more than that in the short term. The money market fund will be less attractive as rates continue to fall, so taking some duration risk using gilts might be worth considering. Is the US Treasuries ETF hedged? (hopefully it is, as you'll have lost out to the dollar weakening if not)

The bond funds have done badly due to interest rates rising from historic lows. You are now considering getting rid of them at the point interest rates are falling again. This is classic buying high and selling low. Though I do think you could make three funds into one fund.

For the question about bond ladders, they are an option, but may not be the best option. Locking in to >10 years of returns now adds inflation risk to your portfolio. Inflation linked gilts are more complex instruments, but the real yield to maturity is much better for that sort of duration now than it has been in the recent past.

dunstonh

At what age do I need to start thinking about derisking, and moving to a more conservative portfolio, and what sort of portfolio would this look like? 

How do you intend to draw your retirement benefits at age 60?
If annuity, then you should start phasng down risk from about 15 years before (how how fast and by how much is a risk decision for the individual to make)
if you are using drawdown, then you may not have to reduce risk at all.     You could be alive for another 30 or so years from age 60. So, your investment period remains long term.

I am trying to create a bond fund to counterbalance by equities but the bond funds haven't done much during the past 3 years I've had them. 

They wouldn't have.  The unwinding of the impact of the credit crunch effectively took place over Dec 2021 to October 2023.   Bonds had their worst 12 month period in over 100 years over October 2021 to Sep 2022.   They are now back in their more typical range.

They've returned 1-2% , a fixed term account would have been better.

But would have been worse over the decade.  You are looking at it too short term.   Every asset class will have short term periods when its better than another.

I don't want to be 100% equities because I couldnt stomach a 30-40% loss, so I need something else in my portfolio.

So, that puts you at around 80% equities if you were looking at 12 month periods (worst one year return on 80% equities, 20% bonds was March 2008 to Feb 2009 at minus 29%.
However, if you are looking at peak to trough, you probably want to fall back towards 60%.

Any suggestion about a counterbalance to equities?

Bonds typically. Short Term money market is coming to an end by the looks of it.  Maybe a small allocation to that for a bit longer but many are moving chunks from STMM to Bonds.   With bond funds that include global bonds, you want currency hedging on the fund. Otherwise you are leaving yourself open to exchange rate movements.

boingy

As above, it boils down to whether you plan an annuity or drawdown.

poseidon1

Interestingly corporate bond funds were similarly hammered when bank base rates climbed significantly, but have been clawing back those losses whilst still delivering decent and consistent income streams.

I do get the impression that when bonds come up for discussion the focus is typically on sovereign government bonds, but there is a significant universe of corporate bond funds also worth considering from investment houses such as Royal London and Artemis. Worth looking at that sector ( for higher yields ) along side sovereign bonds.

Linton

poseidon1 said:

Interestingly corporate bond funds were similarly hammered when bank base rates climbed significantly, but have been clawing back those losses whilst still delivering decent and consistent income streams.

I do get the impression that when bonds come up for discussion the focus is typically on sovereign government bonds, but there is a significant universe of corporate bond funds also worth considering from investment houses such as Royal London and Artemis. Worth looking at that sector ( for higher yields ) along side sovereign bonds.

I also like corporate bonds for their good steady income.  However they are not really an alternative to gilts in an equity/ bond portfolio as their capital values seem to be  more correlated to equity. When equity is down corporate bonds could appear as more of a risk rather than a safe haven

Pizzapie0000

Many thanks for your detailed response:

What do you intend to do when you retire at 60? If the plan is to use a lot of the money to buy an annuity, then derisking that would be more of a priority. Otherwise, a large part of your portfolio is likely to remain invested well beyond that date and would not need derisking prior. Does your pension default fund already have lifestyling built into the fund? Many do.

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

The pension is already more than 2.5x the ISA, and presumably you are paying more into it going forward. So are you planning to generate enough income from the pension to use up your personal allowance and tax free 25%, then supplement from the ISA?
Interesting point, I was planning on using the ISA to help pay down my mortgage. The plan is to let the ISA grow for the next 5 years and then use the proceeds to pay of as much of the mortgage as possible. The mortgage is fairly meaty - around £340k, I am hoping the ISA increases to allow me to pay as much as possible. 

You currently have 20% bonds and 5% gold in the ISA. Perhaps you do not need to derisk any more than that in the short term. The money market fund will be less attractive as rates continue to fall, so taking some duration risk using gilts might be worth considering. Is the US Treasuries ETF hedged? (hopefully it is, as you'll have lost out to the dollar weakening if not)
Yes - all bonds are hedged to the GBP

The bond funds have done badly due to interest rates rising from historic lows. You are now considering getting rid of them at the point interest rates are falling again. This is classic buying high and selling low. Though I do think you could make three funds into one fund.
Do you have any suggestions about which fund i could opt for, i have gone for government bonds because they are meant to offer the greatest protection in a crash.

 

Pizzapie0000

boingy said:

As above, it boils down to whether you plan an annuity or drawdown.

The plan would be to move into drawdown, not an annuity. 

Albermarle

 My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

I think you will find most on this forum, including the more cautious ones, would think 25% equity is too low.
However it does seems reasonably typical of a lot of these lifestyle drawdown pension funds. 

This current long thread may be of interest.
Anyone in high equity allocation whilst retired? — MoneySavingExpert Forum

boingy

That mortgage changes the picture quite dramatically!
What interest rate are you paying on it and, if it is fixed, when does that end?

dunstonh

My plan was to take it into drawndown, rather than purchase an annuity, so I would need to keep the bulk invested. My employer offers a default drawn down fund, the pension fund will slowly switch from a diversified growth fund (65% equity) to a drawn down fund (25% equity)

That is a massive drop in equities.   Typically, those using drawdown in retirement (any regular income method) would be closer to 50-60% equities.   25% is far too low to make drawdown viable in most cases.