Bonds Fund Accumulation Units advice please

baldbloke_2

Every now and then I think I have grasped the basics and then doubt creeps in. Can I ask a most basic question?

If I had purchased £1000 (1000 x 100p) of accumulation units in a Corporate Bond fund this time last year and the 1yr return on the Morningstar performance listings shows as -2.00% then what financial return would I have seen over that year in simple terms? Let us assume a 12mth yield of 5% for the example.

I had come to believe that although the unit price would now be 98p I would have accumulated an extra £50 worth of shares from the dividends (approximately) - meaning that my investment was now worth £1029 (1050 x 98p).
But reading all of this over and over again I am wondering whether the -2.00% return is intended to show that my £1000 is now worth £980 after one year including the reinvested £50.

I'm sorry for all this but I am determined to get my head round this so I can be comfortable with a Bonds Fund or two for a longish term investment.

Many thanks.

Ian_W

With the same caveat as on your first line - my understanding is that an accumulation type of unit reflects the divi in the price of the unit. Whereas Income units, if reinvested, are periodically used to purchase extra units. Overall I think the difference is negligable - with one you have more units at a lower price, with the other you have less units but the price is higher.

I have 2 bond funds [Other rather than Corporate in their IMA classification]. Artemis High Income is only available in income units and that shows extra units being purchased by dividends every quarter. Invesco P Monthly Income + is acc units and shows no such purchases.

To confuse things a little more you may find with an acc fund in an ISA you will get some extra units regularly as a reinvestment of tax on interest which is reclaimed by the manager from HMRC.

So for my money your fund is worth £980.

baldbloke_2

Thank you for that. I find it extraordinary that the safer form of investing can so easily reduce £1000 to £980 over a year rather than increase it to let's say £1040 in a basic savings account. People bang on - excuse me for that - about inflation eroding the value of one's savings and yet I look at the returns on Bonds funds and they do not appear to guarantee even inflation yet alone better than a good savings account.

I get a bit concerned about all this because I very much want to protect the value of savings that I have and so-called 'safer' investments appear to offer that opportunity. But in reality they come across as a very dangerous option for a cautious saver considering becoming a cautious investor.

Thanks again. I'm rambling a bit I know. And 'guarantees' do not come into it - I am aware of that I suppose!

Ian_W

That's why you have got to invest over the longer term and accept some years will be worse than cash [or even inflation] but others will be better. Provided over the longer term they beat cash by a reasonable margin that surely is worth losing out to cash [and inflation] over a shorter period?

For example, Invesco P Monthly Income + discrete annual returns are as follows:
12 months -4.3%,
12-24months +9%,
24-36 months +9%,
36-48 months +15%,
48-60 months +33.8%.

I get a bit concerned about all this because I very much want to protect the value of savings that I have and so-called 'safer' investments appear to offer that opportunity. But in reality they come across as a very dangerous option for a cautious saver considering becoming a cautious investor.

I think the term "safer" is relative to Stock Market volatility rather than always making a positive absolute return each and every year, in addition Bonds carry their own risks - like companies defaulting on their loans. So they're certainly not risk free but no investment is, otherwise it would be a savings account! You might also consider ABSOLUTE RETURN FUNDS - they use a variety ways with varying degrees of success to try to make a positive return in all conditions [again not guaranteed] and I've included short term periods so you can gauge how they've performed in the recent turmoil. I personally hold ML UK Abs Alpha, JPM Cautious Total Rtn & Insight Diversified Target Return - all of which are positive over 12 months even if down a little in the really short term.

If you are so concerned over a 2% loss which isn't realised unless/until you sell - then perhaps you would sleep easier by remaining in cash?

baldbloke_2

Thanks. I knew nothing about Absolute Return funds so went away to google for a few minutes.

http://www.ft.com/cms/s/0/86898afa-c242-11dc-8fba-0000779fd2ac.html

I am quite impressed. Thanks for bringing yet another dish to the table!

baldbloke_2

I apologise for bumping this thread but thought that different people might see it during the daytime.

Confirmation of Ian W's original answer would be much appreciated.

I accept the point that a 2% loss is not significant short term but that represents about 5% - 6% in real terms and if repeated over a few years would leave Corporate Bonds funds well down on a savings vehicle.

EdInvestor

If you buy individual gilts and hold to maturity you will get the fixed income with no loss of capital.But of course this is not possible in a fund where they are trading the bonds. Returns on many bond funds are not high enough after charges to compete with cash and compensate for the risks involved IMHO.

www.dmo.gov.uk

baldbloke_2

EdInvestor wrote: »

If you buy individual gilts and hold to maturity you will get the fixed income with no loss of capital.But of course this is not possible in a fund where they are trading the bonds. Returns on many bond funds are not high enough after charges to compete with cash and compensate for the risks involved IMHO.

www.dmo.gov.uk

Thank you for that - particularly the personal observation at the end.

I was looking at the Bond Sector analysis on the Trustnet site and found it quite realistic. It really does seem that unless you make the right choices you can be very disappointed by the overall returns.

It's strange that for investing a modest amount it almost makes sensible equity funds a more realistic choice for someone like myself.

It is the idea of extending my isa beyond the cash element that seems attractive and everywhere we are told that Bonds are the way to go for the lowest risk. It makes it difficult

cheerfulcat

Hi, baldbloke,

baldbloke wrote: »

It's strange that for investing a modest amount it almost makes sensible equity funds a more realistic choice for someone like myself.

It is the idea of extending my isa beyond the cash element that seems attractive and everywhere we are told that Bonds are the way to go for the lowest risk. It makes it difficult

It is a misconception that bonds are low risk. They carry different risks from those of equities ( so they add diversification to a portfolio ) but bond can prices fluctuate just as disconcertingly as equity prices.

Specifically, bond prices are tied in a big way to interest rates; interest rates go down = bond prices go down.

As Ed points out, bonds held to maturity should ( barring default ) provide an income and, if bought at or below the issue price, security of capital but when traded ( as in a fund ) have added risks. Default risk is practically eliminated by choosing gilts and holding directly.

Edit: you can read more at Incademy. For deeper reading I'd suggest the excellent " Unconventional Success " by David F. Swenson.

purch

bond can prices fluctuate just as disconcertingly as equity prices.

Which is why a Bond Fund is not 'Low Risk' whilst buying and holding the actual Bond itself is.

The biggest thing that causes this difference in risk the the fact that a Fund/ETF does not have a Duration/Maturity.

One of the main components of the calculation for the return on a Bond is it's Duration.

Bonds can be bought at par, or above or below issue price. Bought above par you can get a higher income, and then a capital loss at maturity, which might suit your requirements.

A carefully thought out strategy can mean you can build a portfolio that fits your needs.

'BONDS....the unrivalled path to Investment Success' is another good book on the subject, and has a good section on building a Bond 'ladder' (portfolio)............or any article by Bill Gross founder of PIMCO (Pacific Investors Management Company) and one of the renowned guru's in the Fixed Income world.