New to investing, worried about my 40-60% Funds

[Waspfan]

Yes but of course, it may seem obvious, but there is a big difference between buying a bond and buying a bond fund.

Indeed, but there are also big differences between different kinds of bond funds. My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

As I understand it many bond funds adopt what is called a ladder approach. That is to say that they buy and sell bonds with differing maturity dates to adjust both returns and risk in a rolling manner. This is particularly the case as the yield curve inverts. If you are running a bond fund, why invest in long dated bonds with lower returns than short dated ones with higher returns?

In many ways bonds are just as complicated as equities*, and just as much at risk from political interference. Can anyone argue that QE and high inflation doesn't affect the total return of existing bonds?

As for "did anyone predict a bad time for bonds in advance", the simple answer is yes they did. Now they could have been wrong, in this case they were not. ALL such predictions take the form of "I think this will happen because of XYZ". If XYZ comes to pass then they tend to be right, while if it doesn't then they tend to be wrong.

If you look back a year or two you will find many predicting high inflation. Usually because of QE, though raw material prices were the thing a year ago.. Today you will find many predicting high inflation, because scope to control it is so limited. You will also find predictions about other things. For example that energy companies won't be investing in North sea assets. If true, and I suspect that it will be, then that will affect support companies, though not necessarily the energy companies themselves. It will also likely mean high energy costs for quite some time. Many predictions are just stating the obvious, and at that level tend to come true more often than not.

*Actually I regard bonds as too complicated for me to consider and invest via a fund that will do the complicated stuff for me.

So the only bonds I have are in Multi Asset funds such as these funds, so are we saying they are managed in such a way that they aren't going to be the same level of drag on my fund value as say a stand alone Bond.

Basically I just need to know if the bonds in these 3 funds are managed in a way to attempt too much of a loss.

Liontrust MA Passive Interm Passive S Acc

Royal London Sustainable Div C Acc

Vanguard Lifestrategy 60%

[mc2fool]

Yes but of course, it may seem obvious, but there is a big difference between buying a bond and buying a bond fund.

Indeed, but there are also big differences between different kinds of bond funds. My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

As I understand it many bond funds adopt what is called a ladder approach. That is to say that they buy and sell bonds with differing maturity dates to adjust both returns and risk in a rolling manner.

I thought that was an active approach (one of many of course). VLS is a passive fund, so .... ?

As for "did anyone predict a bad time for bonds in advance", the simple answer is yes they did.

Oh I'm sure so. You know the saying, if you ask 100 forecasters you'll get 130 opinions and some will even be right! The question becomes can you pick which one will be right in advance ...

[Urbandreamer]

As for "did anyone predict a bad time for bonds in advance", the simple answer is yes they did.

Oh I'm sure so. You know the saying, if you ask 100 forecasters you'll get 130 opinions and some will even be right! The question becomes can you pick which one will be right in advance ...

Here is a prediction for you, the sun will rise tomorrow. Can you estimate how likely I am to be right?

To answer your question, yes I do think that I can judge how much faith to put into the value of a prediction.

"Inflation will be transitory", not worth considering when the price of raw materials is rising, ships are unable to dock and there is a shortage of containers to ship things in because they are not being returned.

As I said, if the prediction is anything close to stating the obvious, like mine was, then you can have significant faith in it. If it disagrees with facts that you are aware of then you should discount it.

There has been under investment for years in North sea energy assets and the government has slapped a windfall tax upon oil and gas producers who operate there. Prediction, they shall reduce investment there.
The government changes taxation of private landlords (historic). Prediction, the supply of private rental property will reduce. This has been playing out and we have a number of investment trusts working with housing associations to supply rental property.

It's really just a question following the news and doing your research.

So you really think that you can't judge if we should expect high inflation over the next few years? I was predicting the current inflation situation a year ago, though I didn't predict the war. Knowing that we have a war messing up so many things is it that difficult to predict shortages leading to price rises?

[mc2fool]

As for "did anyone predict a bad time for bonds in advance", the simple answer is yes they did.

Oh I'm sure so. You know the saying, if you ask 100 forecasters you'll get 130 opinions and some will even be right! The question becomes can you pick which one will be right in advance ...

Here is a prediction for you, the sun will rise tomorrow. Can you estimate how likely I am to be right?

Not quite in the same league as predicting the future levels of markets, eh?

To answer your question, yes I do think that I can judge how much faith to put into the value of a prediction.

"Inflation will be transitory", not worth considering when the price of raw materials is rising, ships are unable to dock and there is a shortage of containers to ship things in because they are not being returned.

As I said, if the prediction is anything close to stating the obvious, like mine was, then you can have significant faith in it. If it disagrees with facts that you are aware of then you should discount it.

There has been under investment for years in North sea energy assets and the government has slapped a windfall tax upon oil and gas producers who operate there. Prediction, they shall reduce investment there.
The government changes taxation of private landlords (historic). Prediction, the supply of private rental property will reduce. This has been playing out and we have a number of investment trusts working with housing associations to supply rental property.

It's really just a question following the news and doing your research.

So you really think that you can't judge if we should expect high inflation over the next few years? I was predicting the current inflation situation a year ago, though I didn't predict the war. Knowing that we have a war messing up so many things is it that difficult to predict shortages leading to price rises?

Well ok, so what's your predictions and consequent advice to Waspfan? viewtopic.php?p=505069#p505069

[GeoffF100]

My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

Basically yes. The VLS bond funds will all be market weighted trackers. They will hold every bond within their remit to maturity (unless it no longer qualifies, e.g. as a result of a credit rating downgrade), and buy every new issue within their remit. Apart from that, they do nothing, which is why they are cheap.

[mc2fool]

My understanding of the bond component of the VLS funds is that the constituent bonds are all held to maturity.

Hmmm ... as I type that I begin to doubt my understanding ... anyone know if I'm right?

Basically yes. The VLS bond funds will all be market weighted trackers. They will hold every bond within their remit to maturity (unless it no longer qualifies, e.g. as a result of a credit rating downgrade), and buy every new issue within their remit. Apart from that, they do nothing, which is why they are cheap.

Ok, so it sounds like they buy at issue and hold to maturity, so as such their bond holdings are (defaults aside) zero risk, as the returns are known from the start, and there are and can be no losses in the bond portfolio, aside from transitory paper ones, yes?

But then what about rebalancing vs the equity portfolio? Don't they have to potentially sell bonds before maturity to do that?

[dealtn]

Well ok, so what's your predictions and consequent advice to Waspfan? viewtopic.php?p=505069#p505069

He has posted on a "Passive Investing" board, and stated a preference for having a single fund (and leave it alone).

Why the need for predictions?

[mc2fool]

Well ok, so what's your predictions and consequent advice to Waspfan? viewtopic.php?p=505069#p505069

He has posted on a "Passive Investing" board, and stated a preference for having a single fund (and leave it alone).

Why the need for predictions?

'Cos he's asking for them for his 2 active and 1 passive funds; see link!

[dealtn]

Well ok, so what's your predictions and consequent advice to Waspfan? viewtopic.php?p=505069#p505069

He has posted on a "Passive Investing" board, and stated a preference for having a single fund (and leave it alone).

Why the need for predictions?

'Cos he's asking for them for his 2 active and 1 passive funds; see link!

No. He is asking (in the wrong place) how those funds are managed. He isn't asking for predictions.

[PrefInvestor]

This statement you made ticked the box for me.

"when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value"

Hi Again Waspfan, in that sentence of mine that you quoted (above), to be precise I probably should have said “recouping a proportion of their losses”. How big a proportion they recover will depend upon how much interest rates recover. If they move back down as much as they went up then there is a good chance that they might recover completely.

Of course individual bonds (like individual shares) are also affected by how well or how badly the issuing company performs. If a company is performing so badly that it might be unable to repay its bondholders (unlikely with any major company, but not impossible) then the price will drop significantly (irrespective of interest rates). And should the company go into administration then it’s “goodnight vienna” and the bond will likely become worthless (there might be some residual value recovered during the winding up but it will likely be nothing like it’s original value). The same would be true of the companies ordinary shares of course. This is one reason why investing in collective instruments like Funds, Investment Trusts or ETFs is safer than holding individual bonds or shares yourself. I’d expect a fund like Vanguard Life Strategy to be holding a diversified mix of bonds and shares largely eliminating such single company risks.

You say that your LifeStrategy 60 fund is down by 1.88% since January. Given what’s been going on in the stock markets many equities and equity based funds have performed far worse than that. The S&P 500 is down about 14% and the NASDAQ more like 23%. Compared with that your LifeStrategy Fund has done very well !.

ATB

Pref

[Waspfan]

This statement you made ticked the box for me.

"when interest rates rise bonds and all forms of fixed interest fall in terms of their capital value BUT the regular income that they produce remains unchanged (usually) and when rates fall again bonds and fixed interest will rise in value again recouping their lost value"

Hi Again Waspfan, in that sentence of mine that you quoted (above), to be precise I probably should have said “recouping a proportion of their losses”. How big a proportion they recover will depend upon how much interest rates recover. If they move back down as much as they went up then there is a good chance that they might recover completely.

Of course individual bonds (like individual shares) are also affected by how well or how badly the issuing company performs. If a company is performing so badly that it might be unable to repay its bondholders (unlikely with any major company, but not impossible) then the price will drop significantly (irrespective of interest rates). And should the company go into administration then it’s “goodnight vienna” and the bond will likely become worthless (there might be some residual value recovered during the winding up but it will likely be nothing like it’s original value). The same would be true of the companies ordinary shares of course. This is one reason why investing in collective instruments like Funds, Investment Trusts or ETFs is safer than holding individual bonds or shares yourself. I’d expect a fund like Vanguard Life Strategy to be holding a diversified mix of bonds and shares largely eliminating such single company risks.

You say that your LifeStrategy 60 fund is down by 1.88% since January. Given what’s been going on in the stock markets many equities and equity based funds have performed far worse than that. The S&P 500 is down about 14% and the NASDAQ more like 23%. Compared with that your LifeStrategy Fund has done very well !.

ATB

Pref

Thanks Pref for the further explanation, much appreciated
I made a slight error regarding the downward percentage of my VLS 60 before, I should have said down by 7.3%, sorry for any confusion, and I will now update my original post

Regarding the bonds in my VLS, after reading the many fine post replies on here including of course yours.

I am now presuming, that the bonds in multi asset fund of funds are pooled, and therefore, bonds in the pool are being bought and sold everyday, resting in a possible realignment of updated prices.

I was thinking before, it would be nice if there was any way I could look at my funds and see the total performance for bonds and equity separated, to see if it was bonds which are responsible for any drops or equity

[GeoffF100]

Ok, so it sounds like they buy at issue and hold to maturity, so as such their bond holdings are (defaults aside) zero risk, as the returns are known from the start, and there are and can be no losses in the bond portfolio, aside from transitory paper ones, yes?

Yes, that is how it works. There will be details for dealing with special situations, but that is not important here.

But then what about rebalancing vs the equity portfolio? Don't they have to potentially sell bonds before maturity to do that?

Consider the simplified case of an equity fund and a bond fund. Vanguard may need to sell some of the bond holding and reinvest in the equity fund to rebalance. That will only happen when the bond fund has outperformed the equity fund. Vanguard may be selling some of the bond holding at a loss, but it will be replacing that with an equity holding that is at an even bigger loss.

That strategy works well if the markets are mean reverting, but is counter productive if they are trending. I prefer cash flow rebalancing, but perhaps that is a little complicated for the typical VLS investor.

[Urbandreamer]

Well ok, so what's your predictions and consequent advice to Waspfan? viewtopic.php?p=505069#p505069

My advice, along with others, is to chill.

My prediction.. Well I would expect the bond components of these funds to act as a drag upon performance. Possibly keeping pace with inflation or just slightly better returns than that. Possibly losing money slowly.

The first is a selection of very passive funds that mixes bond indexes and equity indexes.
The second is a far more active and interesting fund, but with a heavy bond component.
No 3 is a mix of global and UK index trackers and bonds. There is a known UK slant to the life strategy funds that is worth investigating if you are unaware of it. Not a problem of course, but worth knowing about.

I'm unsure the reasons that these funds were chosen and specifically I'm somewhat surprised at the choice of A J Bell to hold them.
A J Bell have no cap on their charges for funds, unlike investment trusts, ETF's or should a more active approach be desired, shares.
A different platform might have lower charges for holding the same portfolio. I should say that I use A J Bell and am personally happy with them.

If the desire is a simple passive or semi-passive choice then either the first or 3'ed fund could be used for the entire portfolio. I have a friend who would love the first fund. He hates volatility with a passion.

I predict that we are going into a period of high inflation and possibly stagflation.
Any advice that I give will be inappropriate for this board, but I'll give it anyway as you asked. I would recommend a mix of equity index tracker, capital preservation funds and a small component of "risk on" growth funds.

Waspfan was unhappy with his IFA putting funds in SMT, but I really would recommend 2-3% of the portfolio be put in something like that. It's an active fund though. I hold more than 3% in "risk on" investments.
Likewise all capital preservation funds are active funds. Changing what they hold as the world changes. I'm invested in Ruffer for this purpose. You might like to look at the long term performance of Capital gearing though. Recently the performance has dropped a bit but I understand that compound returns since inception are of the order of 15%pa.
Index trackers, take your pick. I have global, uk and pacific rim trackers.

NOTE, that I regard this advice as totally inappropriate for either this board or Waspfan. Waspfan is clearly risk averse and likes the idea of passive investment. It's important to have a portfolio that you are happy with. Some would say one that allows you to sleep at nights.

[mc2fool]

Likewise all capital preservation funds are active funds. Changing what they hold as the world changes. I'm invested in Ruffer for this purpose. You might like to look at the long term performance of Capital gearing though. Recently the performance has dropped a bit but I understand that compound returns since inception are of the order of 15%pa.

If so most of that must have been in previous decades (inception was 1973). I've held CGT since 2012 and my XIRR is 6.25%pa. Not complaining though, it does what I bought it for. Also hold RICA & PNL, and RCP too, but as you say, all that's OT for here....

[Urbandreamer]

Likewise all capital preservation funds are active funds. Changing what they hold as the world changes. I'm invested in Ruffer for this purpose. You might like to look at the long term performance of Capital gearing though. Recently the performance has dropped a bit but I understand that compound returns since inception are of the order of 15%pa.

If so most of that must have been in previous decades (inception was 1973). I've held CGT since 2012 and my XIRR is 6.25%pa. Not complaining though, it does what I bought it for. Also hold RICA & PNL, and RCP too, but as you say, all that's OT for here....

Names can provide clues.

Scottish Mortgage started off by providing mortgages to the holders of rubber plantations.
Capital gearing started off by using "gearing" or loans to increase the risk/return point. Like SMT they have since changed what they do.

Investing in them is off topic so what they currently do doesn't matter. But I think that some might be interested in such history.

[PrefInvestor]

I made a slight error regarding the downward percentage of my VLS 60 before, I should have said down by 7.3%, sorry for any confusion, and I will now update my original post

Ahh thats not so good then. But not a total disaster.

BTW If you are using AJ Bell (as I saw somewhere earlier in the thread) as the broker for your Funds did you know that they are introducing a 0.25% custody fee on Funds starting in July (I think). That wont help your returns getting charged 0.25% every year on your Fund investments. You might like to think about that.

ATB

Pref

[BullDog]

I made a slight error regarding the downward percentage of my VLS 60 before, I should have said down by 7.3%, sorry for any confusion, and I will now update my original post

Ahh thats not so good then. But not a total disaster.

BTW If you are using AJ Bell (as I saw somewhere earlier in the thread) as the broker for your Funds did you know that they are introducing a 0.25% custody fee on Funds starting in July (I think). That wont help your returns getting charged 0.25% every year on your Fund investments. You might like to think about that.

ATB

Pref

Sorry for posting off topic. That's another 0.25% on top of the 0.25% they already charge? Sounds unlikely?

[GeoffF100]

If the OP is paying through the nose with AJ Bell, he could save himself a lot of money:

https://monevator.com/compare-uk-cheape ... e-brokers/

iWeb is a good option.

[Urbandreamer]

I made a slight error regarding the downward percentage of my VLS 60 before, I should have said down by 7.3%, sorry for any confusion, and I will now update my original post

Ahh thats not so good then. But not a total disaster.

BTW If you are using AJ Bell (as I saw somewhere earlier in the thread) as the broker for your Funds did you know that they are introducing a 0.25% custody fee on Funds starting in July (I think). That wont help your returns getting charged 0.25% every year on your Fund investments. You might like to think about that.

ATB

Pref

Sorry for posting off topic. That's another 0.25% on top of the 0.25% they already charge? Sounds unlikely?

Actually they have got a bit cheaper for large portfolios.
https://www.youinvest.co.uk/sipp/charges-and-rates
I used their calculator and if you have £100k in funds and top up each month you will pay £268pa. It gets worse for larger portfolio's ie £518 for a portfolio twice the size, again using their calculator. The July changes reduce the costs if you have more than £500k in the SIPP.
As I don't own funds in my SIPP with them my fee is £120pa + £18 regular trading fee.
I also have an account (not a SIPP) with II. Their charging structure is more of a flat fee.
https://www.ii.co.uk/ii-accounts/sipp#charges
A portfolio of £100k, £200 or £300 topping up each month would cost £156pa, regardless of if it's funds or other stuff.

[PrefInvestor]

Actually they have got a bit cheaper for large portfolios.

Well I understood that the Funds custody charge was new starting in July 2022. And there is no custody charge at some other brokers eg iWeb.

And that size of portfolio is significantly larger than the OPs.....

Anyway ATB

Pref