Let's discuss... corporate bonds

aroominyork

When I started DIYing in 2017 M&G Optimal Income had over £20bn AUM. Now it's a bit over £1bn. Woolnough got it right during a crash and rode that reputational wave for a long time. Hopefully Golan keeps his mojo when the market goes south. Hopefully...

In any case, he's managing enough of my money. The question is whether to move some gilt/AGBP money into my other corporate bond fund, Royal London Short Duration Credit. It's tempting.

masonic

Despite the pronouncement that "the deal is all signed", I see duration risk as being a greater concern than credit risk for quite a while longer. So it is a reasonable thing to do. You probably won't want to load up on "old man's crypto" as I have done.

aroominyork

Did Ramin come up with that recently or does it go further back?

Talking of Ramin, he doesn't seem to acknowledge the existence of corporate bonds. He sits in the "equities, gilts, or money market (or maybe alternatives)" camp.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82036202#Comment_82036202

I haven't seen that term used before Ramin coined it. He joins a fair number, including Tim Hale, who don't see an investment case for corporate bonds. I would normally concur, but at current equity valuations they start to look attractive compared to projected 10 year equity returns.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82036202#Comment_82036202

Might be worth asking him during one of the Q&As. Sometimes he takes a while to publicly talk about a change of position - perhaps he's more contemporaneous on the private forums. He does mention credit premium not being large enough to consider corporate or junk over government, though I also wonder if ease plays a part.

aroominyork

I think I recall Ramin talking about credit spreads a while back. If I bought corporate bond index funds credit spread might be a factor, but for actively managed funds my decision is driven by expected absolute returns which currently are plenty good enough for me.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82036772#Comment_82036772

I guess that means you're already factoring in credit spread just as you would any other investment - return given the additional risk of in this case a fund that includes corporate (or junk) bonds.

aroominyork

I look at potential levels of return given a fund's risk and compare it to alternative investments. But credit spreads only apply when you compare index funds and, as I mentioned earlier, corporate bond funds seem to have an edge when actively managed; that can compensate if spreads are small. Jonathan Golan's funds would have still performed well if there was zero credit spread.

masonic

https://forums.moneysavingexpert.com/discussion/comment/82036890#Comment_82036890

It's the change in spread over time that is the risk and that applies to all.

Zero credit spread would imply B rated corporate bonds would have the same yield as an equivalent duration gilt.

When spreads widen, a junk bond currently yielding 7 or 8% might rise to 12% or more with an associated reduction in price. Which is one reason to focus on shorter duration.

aroominyork

Yup, I understand what a zero credit spread would mean (though I didn't know B is where the bar is set). I said it to illustrate that low spreads have not been a reason to sit on my cash; a 50% rise in three years justifies the decision. Hopefully I won't eat my words if there is a sudden and large widening.