All Star Manager Portfolio

FATHEROFTWO_2

meester wrote: »

That fund is an institutional fund, designed for pension funds.

generally, if the value of bonds goes up, yield will fall.

This reflects the fact that if the government issues a bond today for £1 with 5.5% yield. This will pay £1.055 in 1 year's time.

Suddenly the Bank of England cuts rates by 2%. A new £1 bond would only pay £1.035.

Yet, I already own a bond, that cost me £1, that will pay £1.055 in a year's time.

So if I sell my bond, I want about £1.02 for it. My bond is worth more.

Yield is also affected by default risk - if the bond issuers start defaulting, you lose your bond and yield plunges. If default risk is perceived to be high, the bond price will fall to reflect that risk. Every bond is priced to reflect the inherent risk of default. E.g., a 30-year-bond issued by Tesco is predicated on Tesco surviving 30 years. The price of that bond (and its initial yield) is reflected by that credit risk, which is non-zero, and also the yield curve, effectively long-term return on cash.

I think I grasp this.

Correct me if Im wrong but hypothetically if a Bond Fund was 100 percent safe
IE no chance of any default and if the average yield was say 6 percent then I would get 6 percent interest paid to me for the lifetime of the bond fund.

But if someone came in say 1 year later and bought the Fund and it had risen to twice what I paid for it then he would get 3 percent yield for the lifetime of the Bond Fund ?

Is This what it means ?

The variables that would effect the Bond are for the Risk of any one of the many Bonds within the Bond Fund to DEFAULT this would then impact on the Bond Fund Price and yield ?

So in attempting to answer my earlier question providing if two BOND FUND have the same level of risk I am better choosing the Bond Fund that pays the HIGHEST YIELD is this correct ?

Although I think you will come back and say that that is why the yield is different as the risk is different in each FUND is this correct ?

munk

Sorry not a direct answer to your last question but there's a good guide on bonds and gilts here which explains the nitty gritty over on the MoneyExtra site:

Gilts & Bonds

Here's the TOC for the page:

• What are bonds?
• What are gilts, bunds and treasuries?
• How risky are gilts?
• How are bonds different from shares?
• How can I invest in bonds?
• How do corporate bond funds work?
• How do I decide which bond fund to invest in?
• How do credit ratings affect bonds?
• How do interest rates affect bonds?
• What other factors determine the price of a bond?
• What other kind of bonds are there?

FATHEROFTWO_2

So re Corporate Bunds.

Manager performance and history does NOT have the same bearing as other manageds EQUITY funds in that I am better buying the top rated CORPORATE FUND WITH THE HIGHEST YIELD as I believe Dunstonh was implying earlier.

Perhaps using the Morningstar site and sorting by FIVE STAR RATING then selecting the Highest paying YIELD.

Would this be as good a way in selecting a corporate Bond ?

munk

Manager performance does still count with bond funds - instead of the manager carefully selecting the right stocks to invest in, a bond fund manager carefully selects the right bonds to invest in. Well that's the plan anyway!

So yes manager performance does still count for bond funds - a bad bond fund manager could pick a bunch of bonds that don't do very well over time for whatever reason and you wouldn't want that

As for just picking the highest rated bond funds with the highest yield, that's probably not the best way because the higher the yield is, the higher the risk associated with the fund. As explained above (by meester I think?) higher yielding funds have that high reward dangling there because the underlying bonds are inherently more risky - as always the generic relationship holds true of high risk equaling potential high rewards but equally with higher potential losses as well.

Probably a better way to go about picking the bond funds is to ascertain your risk profile for the bond portion of your portfolio and then select the funds that match that risk profile. So if you want the bond holding to average 5% downside risk/volatility, look to having a bond selection that averages that.

If you're using morningstar, screen only the bond sector(s) you want, then sort the columns by 3yr SD and you'll get an idea how volatile each fund is. Or perhaps sort first by 1/3/5yr performance and then toggle the volatility columns on so you can see how volatile each fund is.

ie Go here: http://www.morningstar.co.uk/UK/fundscreener/results.aspx?lang=en-GB&Universe=FOGBR%24%24ALL&IMASector=LC00000061 - click on the 'ytd' column to sort by return for ytd, then click on 'performance' and look at the SDs for each fund - note this is just an example though, screening by performance for year to day is just an example! Click on 'change criteria' to change to a different IMA sector (like uk other bonds or whatever).

Bear in mind what meester said above though (again I think?) regards the other ratios like sharpe, r-squared, alpha and beta. SD is only a measure of the volatility of a fund and doesn't tell you anything about how much 'value' a manager added to the fund's performance or how reliable the SD measure is (ie how close to 1 the r-squared ratio is).

FATHEROFTWO_2

Thanks Munk thats exactly what I wanted to hear.

It seemed to good to be true to select the top fund.
Its down to comparing all the factors which sounds more realistic combined with manager skill.

aspiration_2

Thanks to FATHEROFTWO for raising some important issues. As the focus has turned towards gilts/bonds I felt this is the right time to ask about something that has puzzled me. I have read about gilts/bonds.

It appears to me that the yield of bonds hover below 6% most of the time. What is the advantage of gilts/bonds when fixed term bank accounts can give better rates ? Is it because of the uncertainity of interest rates in the long term ?

Thanks

jamesd

Yields can vary far more than that but one benefit is that they can be held inside a S&S ISA or pension tax wrapper to save tax, unlike a bank account. The lower yield/risk ones offer some stability and at times offer greater returns than equities. Higher risk bonds can pay yields considerably above 6%, as can any bond when interest rates are high.

FATHEROFTWO_2

I am looking at Diversifying my Riskier emerging markets element of my portfolio From Gartmore China £1500 and JPM natural resources £2500

IE £4000 INVESTED

TO

FIRST STATE ASIA PACIFIC LEADERS £1500
ALIANZ RCM BRIC STARS £1500
JPM NATURAL RESOURCES £1000

This would effectively combined with my portfolio give me
latin america 2 percent
Japan 0.6 percent
Australasia 2.5 percent
emerging 4 tigers 4.1 percent
Emerging Asia ex 4 tigers 5.5 percent.

I realise that this is some 14.7 percent of my portfolio and intend to reduce to about 7 percent.

Any thoughts on what I should change about the combination of funds allocated to each sector or fund?

Any thoughts on the Funds chosen or any other Funds that may be better?

I was also thinking of not investing with jpm natural rscorces due to the volatility and just top up my Bond Fund any thoughts ?

jamesd

JPM Natural Resources has a significant gold component so it'll be a better diversifier in case of a widespread market downturn. Maybe leave 2000 there.

munk

Came across this link and thought of this thread:

Steer Clear Of Stock Market Storms (about investing in gilts and bonds)

Also some warning on Working Lunch today about the increased risk from defaults on uk corp bonds... can watch again via iPlayer (not a lot to the interview tbh though).