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TIP5

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
mc2fool
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Re: TIP5

#435383

Postby mc2fool » August 17th, 2021, 1:59 pm

CliffEdge wrote:Yes I was going to ask why currency exchange rate variation doesn't affect lifestrategy 100 for example, which I have invested in. It seems to have gone up a bit recently but has significant allocation to US shares. So there must be significant exposure to dollars in there, which I therefore already have?

Yes, of course, it has a large weighting to the US, if you look at its holdings. US Equity Index fund + S&P 500 ETF + part of FTSE Developed Word ex-UK. https://www.vanguardinvestor.co.uk/investments/vanguard-lifestrategy-100-equity-fund-accumulation-shares/portfolio-data

CliffEdge wrote:I may be pessimistic but I just don't see what's so wonderful about Britain in the eyes of the rest of the world?

Ah, but "in the eyes of the rest of the world" is the key. You've got to consider not only your view but also that of the rest of the market. In other words, is your pessimism already in the price, 'cos the rest of the market agrees with you? (Personally I have no idea!)

CliffEdge wrote:I read somewhere that the whole UK stock market is worth less than Tesla. That makes the US a force to be reckoned with and probably best to be in.

Tesla no. But if you look at the portfolio of a world tracker, say VWRL, you'll see that Apple+Microsoft is the equal 2nd largest "country" in the world, equal to Japan. And Apple alone is 5th, after the USA, Japan, China and the UK. https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data

But again, does that indicate that it's a place to be, or that it's all already in the price and is overvalued? (Again, I have no idea!)

CliffEdge wrote:Reading the excellent replies here, it seems that buying TP05 is effectively exchanging pounds for dollars.

And so is TIP5 or any other US$ based investment if you're a sterling based investor!

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Re: TIP5

#435392

Postby AWOL » August 17th, 2021, 2:42 pm

CliffEdge wrote:Yes I was going to ask why currency exchange rate variation doesn't affect lifestrategy 100 for example, which I have invested in. It seems to have gone up a bit recently but has significant allocation to US shares. So there must be significant exposure to dollars in there, which I therefore already have?

I may be pessimistic but I just don't see what's so wonderful about Britain in the eyes of the rest of the world? Speaking personally I think it's a wonderful place but how long can it stay that way now we're out on our own. Course it may be the making of us.

I read somewhere that the whole UK stock market is worth less than Tesla. That makes the US a force to be reckoned with and probably best to be in.

Reading the excellent replies here, it seems that buying TP05 is effectively exchanging pounds for dollars.

Goodness me this investment park is complicated.


Buying TIPS is exchanging pounds for dollars unless you hedge the currency. Lifeguard <100% funds hedge overseas bonds. They don't hedge equities because currency volatility is a smaller proportion of equity volatility than it is bond volatility.

There's a free book available here called Global Asset Allocation it explains the hedging argument well: https://mebfaber.com/books/

Vanguard used to have a Lifestrategy UK model PDF that explained their logic (the same as that book) but I cannot find it anymore. Here's a snippet from the US document to consider...

Image

With lower yields, and lower yielding government bonds, the effect is greater.

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Re: TIP5

#436236

Postby Hariseldon58 » August 20th, 2021, 1:32 pm

With respect to the hedging of US treasury debt you may choose to hold in dollars, I do so deliberately because I want the dollar exposure. I have a lot of exposure to US equities, if they fall sharply I hope the US treasury debt will hold up fairly well and will probably buy back into the US equity market, I won't want the complication of the bonds being hedged to pounds.

When markets get fretful a little swapping between VUTY and VUSA has proved to be a profitable little side trade in the past.

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Re: TIP5

#438828

Postby CliffEdge » September 1st, 2021, 10:31 am

I've been thinking about this hedging business and I'm baffled. Would appreciate any help.

Say on June 2019 there is £1 to $1 and the bond fund costs $1. So you buy one hedged bond for £1. Call it bondA.

Then on June 2020 there is £1.2 to $1 and the bond fund costs $1 so a bond costs £1.2. call it bondb.

Then on June 2021 the bond fund costs $1.2

So because of hedging bondA is now worth £1.2 but bondb is now worth £1.44, though each is actually one equal bond in the fund.

This doesn't make sense. Where am I going wrong?

mc2fool
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Re: TIP5

#438873

Postby mc2fool » September 1st, 2021, 11:57 am

CliffEdge wrote:I've been thinking about this hedging business and I'm baffled. Would appreciate any help.

Say on June 2019 there is £1 to $1 and the bond fund costs $1. So you buy one hedged bond for £1. Call it bondA.

Then on June 2020 there is £1.2 to $1 and the bond fund costs $1 so a bond costs £1.2. call it bondb

No, if there is perfect hedging and the hedge point (of the fund, nothing to do with your actions) just happened to be at the time you bought bondA, i.e. at £1 to $1, then bondB will cost £1.

That's the point of hedging, to remove exchange rate variations, i.e. to give you a static exchange rate, and so give you the same %age return as in the fund's "native" currency.

In reality there's no perfect hedging, just some forward contracts. Vanguard did have an article explaining how their hedging works and the effect of it, but I can't find it right now ... maybe someone has a link?

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Re: TIP5

#438941

Postby CliffEdge » September 1st, 2021, 2:21 pm

mc2fool wrote:
CliffEdge wrote:I've been thinking about this hedging business and I'm baffled. Would appreciate any help.

Say on June 2019 there is £1 to $1 and the bond fund costs $1. So you buy one hedged bond for £1. Call it bondA.

Then on June 2020 there is £1.2 to $1 and the bond fund costs $1 so a bond costs £1.2. call it bondb

No, if there is perfect hedging and the hedge point (of the fund, nothing to do with your actions) just happened to be at the time you bought bondA, i.e. at £1 to $1, then bondB will cost £1.

That's the point of hedging, to remove exchange rate variations, i.e. to give you a static exchange rate, and so give you the same %age return as in the fund's "native" currency.

In reality there's no perfect hedging, just some forward contracts. Vanguard did have an article explaining how their hedging works and the effect of it, but I can't find it right now ... maybe someone has a link?


So I think what you're saying is that hedging applies from the launch of the fund. So in my example £1 would always buy $1 of bond fund even after many years had passed. Thank you for clearing that up.

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Re: TIP5

#438981

Postby Hariseldon58 » September 1st, 2021, 5:19 pm

CliffEdge wrote:So I think what you're saying is that hedging applies from the launch of the fund. So in my example £1 would always buy $1 of bond fund even after many years had passed. Thank you for clearing that up.


No. It gets complicated when you get to the details, there was a great explanation on iShares site about the length of the currency contracts and the limitations of hedging but I can’t find it, but there is this link which a pretty good explanation of the general principles. its worth noting that the effect of different interest rate regimes in different currencies can be a significant factor.

https://www.justetf.com/uk/news/etf/why-currency-hedged-etfs-are-rising-in-popularity.html


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