Asset Allocation - Bond Proxies

Wider investment strategy discussions not dealt with elsewhere
Stanley117
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Joined: December 27th, 2016, 1:11 pm

Asset Allocation - Bond Proxies

Postby Stanley117 » December 27th, 2016, 2:14 pm

I am a newbie to and recently moved to DIY ISA portfolio. Over the last year I have regularly read posts on Motley Fool and now Lemon Fool.

Due to my platform charging structure I have moved from OEICs and recently built a portfolio using individual low cost ETFs to mimic the breakdown of the All World index ETF (VWRL). I also have some Cash / Gilt ETF / Corp Bond ETF/ property ETF to counteract the Equity ETFs

The Asset allocation ratio is 70% Equity ETFs /30% Cash, Bonds, Property ETFs

I also have some legacy Share certificates in Severn Trent Water, British Telecom and National Grid. These types share are often described as "Bond Proxies" .

My question is - Should I consider these Utility shares in the Equity Part or the Bond part of my 70% / 30% asset allocation or neither ?

Thanks,

Stan

tjh290633
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Re: Asset Allocation - Bond Proxies

Postby tjh290633 » December 27th, 2016, 3:40 pm

Definitely put them as equities. Look at their behaviour and performance and you will see why.

stevensfo
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Re: Asset Allocation - Bond Proxies

Postby stevensfo » December 27th, 2016, 5:34 pm

I also have some legacy Share certificates in Severn Trent Water, British Telecom and National Grid. These types share are often described as "Bond Proxies" .


I discovered TMF in 1999 and never once heard that expression until this year. It was someone talking about a REIT.

Ten years ago, I probably thought of Lloyds and Woolworth as a Bond Proxy.

Where the hell did this ridiculous expression come from, and can we please put it to rest?

They are not bonds.

Steve

Stanley117
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Re: Asset Allocation - Bond Proxies

Postby Stanley117 » December 27th, 2016, 6:33 pm

stevensfo wrote:
I also have some legacy Share certificates in Severn Trent Water, British Telecom and National Grid. These types share are often described as "Bond Proxies" .


I discovered TMF in 1999 and never once heard that expression until this year. It was someone talking about a REIT.

Ten years ago, I probably thought of Lloyds and Woolworth as a Bond Proxy.

Where the hell did this ridiculous expression come from, and can we please put it to rest?

They are not bonds.

Steve


I have heard many financial journalists over the last two years use the term 'Bond Proxy' to describe companies such as Unilever, P&G, UU, Severn Trent Water, British Telecom, SSE, National Grid, etc. I suppose they mean these company has a reliable dividends but as you said "They are not bonds"

1nv35t
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Re: Asset Allocation - Bond Proxies

Postby 1nv35t » December 29th, 2016, 11:35 pm

No harm in considering all stocks to be a form of undated variable coupon bond. As also you might consider gold as a form of zero coupon bond. Looking at all assets as a form of 'bond' of one sort of another can be a useful approach. Gold at one extreme end, Stocks at the other and a barbell of the two might compare to a more central bond bullet type of thought train. Within that some stocks might be more towards the central (treasury bond) point, others more towards the outer edges. No harm in diversifying across that scale.

Similarly a property/home could be considered as being equity. Include the imputed rent benefit of owning a home and its similar to a stock : price that rises - typically broadly in alignment with inflation but in a volatile manner, together with a dividend in the way of imputed rent. If you sold your home, invested the proceeds in stocks and rented instead then you'd ideally need to see stock prices rise with house prices, and stock dividends that were sufficient to cover the gross rent you were paying.

'Equity' and 'Bonds' are too broad terms. Within bonds for instance there are some junk bonds that are more stock like than bond like. Similarly within stocks there are some that are more bond like than stock like. One investor might be 30/70 stock/bonds, but endure more volatility than another who was 70/30 stock/bonds, subject to the actual holdings.

Degsy67
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Re: Asset Allocation - Bond Proxies

Postby Degsy67 » December 30th, 2016, 1:47 pm

1nv35t wrote:No harm in considering all stocks to be a form of undated variable coupon bond...

Similarly a property/home could be considered as being equity...


There's no harm considering a duck to be a penguin, except it isn't one. If it walks like a duck and quacks like a duck then guess what?

Degsy

Gadge
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Re: Asset Allocation - Bond Proxies

Postby Gadge » December 30th, 2016, 5:46 pm

Property should be considered a risk asset together with equities.

You should therefore include it in the 70%, as indeed should ALL equities be.

This idea of replacing vwrl with individual equities to reduce cost seems like a faff to me. How and when will you rebalanced it to keep it accurate? Is the cost saving really worth it? VWRL is cheap enough anyway.

Gadge

kempiejon
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Re: Asset Allocation - Bond Proxies

Postby kempiejon » December 30th, 2016, 8:58 pm

Gadge wrote:This idea of replacing vwrl with individual equities to reduce cost seems like a faff to me. How and when will you rebalanced it to keep it accurate? Is the cost saving really worth it? VWRL is cheap enough anyway.

Gadge

The OP was replacing vwrl with ETFs, one can make a good copy using vusa, vjpn, vmid, vuke, verx, vapx, vfem, vgov. Sorry for the epics, they're all vanguard etfs and cover USA, Japan, FTSE250, FTSE200, Europe exUK, Asia exJapan,, Emerging Markets, government bonds. I did some sums and depending upon exact proportion you can halve the 0.25% vwrl down to 0.12%

Bubblesofearth
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Re: Asset Allocation - Bond Proxies

Postby Bubblesofearth » December 31st, 2016, 9:24 am

1nv35t wrote:No harm in considering all stocks to be a form of undated variable coupon bond......
Similarly a property/home could be considered as being equity.


The problem with lumping all assets together like this is that it risks ignoring the value of diversification that is achieved by holding weakly correlated asset classes. Bonds, equities and property often move orthogonally to each other.

BofE

1nv35t
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Re: Asset Allocation - Bond Proxies

Postby 1nv35t » December 31st, 2016, 12:33 pm

kempiejon wrote:
Gadge wrote:This idea of replacing vwrl with individual equities to reduce cost seems like a faff to me. How and when will you rebalanced it to keep it accurate? Is the cost saving really worth it? VWRL is cheap enough anyway.

Gadge

The OP was replacing vwrl with ETFs, one can make a good copy using vusa, vjpn, vmid, vuke, verx, vapx, vfem, vgov. Sorry for the epics, they're all vanguard etfs and cover USA, Japan, FTSE250, FTSE200, Europe exUK, Asia exJapan,, Emerging Markets, government bonds. I did some sums and depending upon exact proportion you can halve the 0.25% vwrl down to 0.12%

Personally I see a benefit of being able to more equal weight than going with global cap weight that the likes of VWRL tends to reflect (50% US type of tilt).

If you can achieve similar 0.125% type costs for either Vanguard ETF's or Vanguard Accumulation (assuming that is the more preferred choice) Funds, which is the better of the two to go for?

With funds you're limited to end of day trading (prices) and (assuming you have the £100K+ minimum to open a account directly with Vanguard) trade without spread costs and have all dividends automatically reinvested. With ETF's you can trade on the open market at any time during market hours, incur spread costs and dividend reinvestment costs. Seems like the Fund choice might be the better, but does that incur too much single counter-party risk (Vanguard)? Are there any tax efficiencies of one over the other (thinking specifically about withholding taxes)?

As I understand it Vanguard is structured such that the funds (and hence shareholders) in effect own the group (upside down structure) and is run on a not for profit type basis. The fund is also UK based whilst for ETF's many of those are domiciled in Ireland.

The lines along which I'm thinking is a spreadbet (Ayondo fully funded so no overnight costs) for UK exposure (FT250)), BRK-B for US, WES.AX for Australia, along with VJPN (Japan), VERX (Europe exc. UK), VFEM (Emerging Markets), VAPX (developed Asia exc. Japan) type ETF's (or similar funds).

Stanley117
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Re: Asset Allocation - Bond Proxies

Postby Stanley117 » January 1st, 2017, 1:53 pm

Degsy67 wrote:
1nv35t wrote:No harm in considering all stocks to be a form of undated variable coupon bond...

Similarly a property/home could be considered as being equity...


There's no harm considering a duck to be a penguin, except it isn't one. If it walks like a duck and quacks like a duck then guess what?

Degsy


Based on the discussion so far instead of having a 70% Equity/ Bonds ratio perhaps I should regard my current asset allocation in terms of :-
70 % Risk Assets / 30% Uncorrelated (safer) Assets

Along with my VWRL like copy using Regional ETFs I believe I should include HY junk Bonds with the 70 % Risk Assets.

As the value history of my Utility shares (ST & NG) performs more like Bonds I think I will regard these utilities on the 30% Uncorrelated (safer) Assets side along side my Bond ETFs VGov, SLXX, IS15, GLTS.

Stanley

BusyBumbleBee
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Re: Asset Allocation - Bond Proxies

Postby BusyBumbleBee » January 8th, 2017, 6:51 pm

I wonder if the Green Infrastructure funds are the closest things to "Bond Proxies"

Their revenues mostly come from government backed subsidies and power prices. They yield about 6% now and the boards have all promised to raise dividends in line with RPI

They are BSIF, FSFL, JLEN. NESF, TRIG and UKW

Stanley117
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Re: Asset Allocation - Bond Proxies

Postby Stanley117 » January 8th, 2017, 11:21 pm

BusyBumbleBee wrote:I wonder if the Green Infrastructure funds are the closest things to "Bond Proxies"

Their revenues mostly come from government backed subsidies and power prices. They yield about 6% now and the boards have all promised to raise dividends in line with RPI

They are BSIF, FSFL, JLEN. NESF, TRIG and UKW



These all seem to be trading at a large premium to their Net Asset Value.

Stan

BusyBumbleBee
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Re: Asset Allocation - Bond Proxies

Postby BusyBumbleBee » January 9th, 2017, 8:11 am

These all seem to be trading at a large premium to their Net Asset Value.


True - but so are bonds, retail bonds and pref shares.


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