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Asset Allocation

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

#508832

Postby AWOL » June 22nd, 2022, 1:55 pm

Hariseldon58 wrote:
With regard to further diversification, take a look at the annual reports of Capital Gearing Trust (CGT) , they hold some interesting investments apart from vanilla stocks and bonds.

I would have said be cautious with leveraged ETFs but Hiriskpaul has given a very comprehensive explanation of the potential pitfalls…


I have modelled all the variables through my psychohistory model and concluded that leveraged ETFs are not for times of economic volatility and in truth not for pedestrian fellows like myself. As you imply, Caveat emptor.

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Re: Asset Allocation

#508850

Postby SalvorHardin » June 22nd, 2022, 2:38 pm

As has already been mentioned, the alternatives to shares and bonds tend to have very high transation and ongoing costs. Most alternative investments are illiquid, which can be a serious problem for some investors. Remember the recent problems with open-ended property funds; theit way of coping with a flood of redemption requests was to refuse to honour them because they couldn't raise the cash quickly by selling properties.

BTL properties, a popular investment for some, have become increasingly stressful with the government recently hammering them with tax changes and more laws favoring tenants. A friend used to have a Buy-To-Let flat; a few years ago he sold because he was fed up with the aggrevation in dealing with tenants, agents and changing tax laws.

Increasingly you can find companies whose business is to own and/or manage these alternative assets and it is much, much easier to buy their shares. Sure, at times these shares are going to see their prices bashed solely because of the wider stock market, rather than their performance, but then again the price of alternative investments often falls without investors becoming aware of it because prices are not widely published or updated regularly (unlike share prices).

Some of the more esoteric investments (e.g. barrels of whisky, rare wines) will involve investors taking on a whole new layer of risk with the intermediary who deals with them on their behalf. Antiques is a somewhat similar asset class, but I'd need to acquire a whole lot of specialist knowledge and there are extremely high transaction costs involved. Unfortunately years of watching "Lovejoy", "Flog It" and "Antiques Road Trip" haven't given me sufficient knowledge that I'd be happy to put a lot of money into antiques, though I have learned that brown furniture used to be a good store of value but in recent years the market has collapsed.

A few years ago I spent quite a bit of time looking for quoted companies whose business is owning and dealing in antiques and fine art, all I could find were the auction houses (I know that some investment banks have in the past run funds specialising fine art, but these have very high minimum investments and are very illiquid).

Off the top of my head (I own some of these), here are a few contenders:

Music royalties - Hipgnosis Songs Fund

Farmland - Farmland Partners, Gladstone Land (the only two American REITs I know of that specialise in farmland))

Renewable energy projects - The Renewables Infrastructure Group (and many other infrastructure companies)

Public sector infrastructure - HICL Infrastructure, Primary Healthcare Properties (most of whose business is owning GP surgeries and renting them out)

Real assets - Commercial property companies / REITs. Alternative asset managers like Brookfield, Carlyle Group and Blackstone. Grainger for residential rentals.

Mining royalties - a different way to make money out of mining, these companies collect royalties on production rather than actual mine the stuff. There are quite a few royalty companies out there, such as Canada's First Majestic Silver and the London quoted Anglo Pacific.

Debentures for the Wimbledon Tennis tournament (there are other sporting events which offer similar and which run secondary markets for owners)

I'm in a fortunate position in that whilst my portfolio is my sole source of income, it's large enough (and I live cheaply) that I can tolerate a huge decline in my income before it really starts to affect my lifestyle. So I'm happy to take the risk of having most of my money in shares.

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Re: Asset Allocation

#508865

Postby farwide » June 22nd, 2022, 3:48 pm

I think somebody already linked to my bonds post. Well, that was inspired by a nod towards a risk parity portfolio. I've read and agreed with much of what the site portfoliocharts has advocated in that respect, which in short means that an allocation to bonds and gold won't enhance your long term returns probably, but will at least typically cushion the worst performing years somewhat. If you haven't seen it, the golden butterfly portfolio from his site takes that idea to the extreme conclusion (I personally can't stomach 20% gold though, I'm just at 6% currently).

As @salvadorhardin put it, probably the best defence in times like these is not really based on tweaks to allocation but instead to be in a position where your portfolio "is large enough (and one can live cheaply enough) that one can tolerate a huge decline in my income".

That doesn't necessarily mean amassing millions though. In my case, I'm on the lean side with my portfolio size by most standards here I expect (as I FIRE'd young) but even with all of the falls so far I still withdraw a shade under 2.4% of my current portfolio value a year.

It all depends where you are in your financial life though of course. If one still has many working years left, I'd advocate just ploughing in everything that can be afforded into equities and trying not to pay too much attention until your desired retirement date draws close.

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Re: Asset Allocation

#508872

Postby Sternumator » June 22nd, 2022, 4:12 pm

hiriskpaul wrote:Inverse ETFs and especially 3X inverse ETFs can be dangerous and may not behave in the way you are expecting. Even if you are right on direction, you can still lose money due to volatility drag. eg invest £100 in a 3X inverse ETF, with market at 100. Market rises to 110, then falls to 95. Your ETF position will fall 30% then gain about 41% (3 times 15/110), so is now worth 100*0.7*1.41=£98.7. Even though you were right about the net direction of the underlying you still lost money!

Had the underlying fallen to 85 then risen to 95, you would have lost even more money. £100 up to £145 then down about 35% (3 times 10/85) to £93.80. In other words inverse ETFs suffer from volatilty drag and the outcome is path dependent. In addition, the expected loss increases with the length of time you hold so not only do you have to be right about the direction, you have to be right about the path and be right quickly!

You can make money out of inverse ETFs but the odds are stacked against you.


The flip side of that is if the market rises to 110 then rises to 120, your position will fall by 30% then another 27% (3 times 10/110) so it is now worth £50.91. The market has moved 20% which multiplied by three is 60% but you have lost lest than 50%.

The maths works the same if the market moves in your favour.

Obviously you will get different results from rebalancing compared to not rebalancing. Sometimes it works out better, sometimes it doesn't but the odds aren't stacked against you.

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Re: Asset Allocation

#508877

Postby hiriskpaul » June 22nd, 2022, 4:26 pm

It is a reasonable working assumption that asset classes, derivatives, factors, hedge fund strategies, etc. all have similar risk adjusted returns at any point in time. If that is not the case then money tends to flow towards whatever is likely to deliver the better risk adjusted return, which evens things up. I am talking about established rational stuff here, not speculative scammy crypto-babble type nonsense.

Occasionally things get missed and it can take some time for corrections to take place and money can be made when that happens, but over an extended period the returns achieved, adjusted for risk, roughly evens out. This does not necessarily apply at the individual security level where unsystematic risk comes into play, but at the level of broad categories where that unsystematic gets diversified away, so global equities (but not individual shares), fine art (but not individual pieces), property (but not individual properties) should produce similar risk adjusted returns. As discussed by SalvorHardin, the problem for retail investors is most of these alternative investments are hard to access at low prices. Property is possible through BTL, but not without the high unsystematic risk of owning just a few similar types of property and having to do a lot of the managing yourself. You could load up on REITs as an alternative to diversify away the unsystematic risk but then there is a whole layer of cost between you and the return on the assets. Compared with some alternative investments though, the costs associated with REITs is trivial. It is an absolute classic that HF strategies typically reward those running the HF to a far greater extent than they do HF investors.

On the reasonable working assumption that all types of investments should have approximately the same risk adjusted returns, why not simply target the sources of risk and return available at low cost? Global equities are probably the best place to start as they can be accessed for peanuts, then use retail cash deposits to adjust for the desired level of risk. Job done. Not what I do, but I do occasionally ask myself why not? Especially on days when the price of oil has dramatically moved against me :cry:

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Re: Asset Allocation

#508879

Postby hiriskpaul » June 22nd, 2022, 4:40 pm

Sternumator wrote:
hiriskpaul wrote:Inverse ETFs and especially 3X inverse ETFs can be dangerous and may not behave in the way you are expecting. Even if you are right on direction, you can still lose money due to volatility drag. eg invest £100 in a 3X inverse ETF, with market at 100. Market rises to 110, then falls to 95. Your ETF position will fall 30% then gain about 41% (3 times 15/110), so is now worth 100*0.7*1.41=£98.7. Even though you were right about the net direction of the underlying you still lost money!

Had the underlying fallen to 85 then risen to 95, you would have lost even more money. £100 up to £145 then down about 35% (3 times 10/85) to £93.80. In other words inverse ETFs suffer from volatilty drag and the outcome is path dependent. In addition, the expected loss increases with the length of time you hold so not only do you have to be right about the direction, you have to be right about the path and be right quickly!

You can make money out of inverse ETFs but the odds are stacked against you.


The flip side of that is if the market rises to 110 then rises to 120, your position will fall by 30% then another 27% (3 times 10/110) so it is now worth £50.91. The market has moved 20% which multiplied by three is 60% but you have lost lest than 50%.

The maths works the same if the market moves in your favour.

Obviously you will get different results from rebalancing compared to not rebalancing. Sometimes it works out better, sometimes it doesn't but the odds aren't stacked against you.

It is complicated and you are right, some scenarios give better results than a straight short that does not get re-adjusted for risk everyday. However, once you aggregate over all paths, good and bad, the odds are definitely stacked against you. I will not be able to prove this to you, but if you want to see empirical evidence look at the price history of inverse ETFs. Most are absolutely dire. Some can have good runs I grant you. ETFs that systematically shorted VIX futures had a fantastic run for years, then one afternoon a few years ago they all blew up.

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Re: Asset Allocation

#508887

Postby Sternumator » June 22nd, 2022, 5:34 pm

People make the volatility drag point about leveraged long ETFs but buying TQQQ would have worked well until this year. Even with the large drop, it is still up 5,600% since 2010.

The odds are against you with inverse ETFs, like any short position, if you believe the market will go up over time.

Short positions aren't diversifiers. It goes to your point about the market correctly pricing risk, shorting can reduce risk but it will also reduce the return. You must pay for the downside insurance it provides. Therefore, long/short strategies are only useful if you have a particular view about an asset. Otherwise, you could achieve the same reduction in risk more cheapily by reducing your equity allocation.

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Re: Asset Allocation

#508894

Postby hiriskpaul » June 22nd, 2022, 6:31 pm

Sternumator wrote:People make the volatility drag point about leveraged long ETFs but buying TQQQ would have worked well until this year. Even with the large drop, it is still up 5,600% since 2010.

The odds are against you with inverse ETFs, like any short position, if you believe the market will go up over time.

Short positions aren't diversifiers. It goes to your point about the market correctly pricing risk, shorting can reduce risk but it will also reduce the return. You must pay for the downside insurance it provides. Therefore, long/short strategies are only useful if you have a particular view about an asset. Otherwise, you could achieve the same reduction in risk more cheapily by reducing your equity allocation.

You dont need to make any assumption about the market going up to lose money. You will lose money holding an inverse ETF even if the market goes sideways.

Going short a security/future carries much more risk than going long. The price of a security can only go to zero, so your maximum loss is bounded when you are long. Going short means your downside is is unlimited, so a long/short strategy is not equivalent to a reduction in equity allocation. Long/short carries the risk of substantial losses, which occasionally bites those doing it very hard. Gamestop? The VW short squeeze? I have done long/short a few times and have had to watch it like a hawk. Definitely not equivalent to reducing a long position.

You can be dead right about an overpriced security (eventually) but lose a ton of money trying to profit from that opinion.

Inverse ETFs cap your downside, but you pay for the risk reduction in (expected) volatility drag.

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Re: Asset Allocation

#508907

Postby Sternumator » June 22nd, 2022, 9:06 pm

hiriskpaul wrote:It is a reasonable working assumption that asset classes, derivatives, factors, hedge fund strategies, etc. all have similar risk adjusted returns at any point in time. If that is not the case then money tends to flow towards whatever is likely to deliver the better risk adjusted return, which evens things up. I am talking about established rational stuff here, not speculative scammy crypto-babble type nonsense.

Occasionally things get missed and it can take some time for corrections to take place and money can be made when that happens, but over an extended period the returns achieved, adjusted for risk, roughly evens out. This does not necessarily apply at the individual security level where unsystematic risk comes into play, but at the level of broad categories where that unsystematic gets diversified away, so global equities (but not individual shares), fine art (but not individual pieces), property (but not individual properties) should produce similar risk adjusted returns. As discussed by SalvorHardin, the problem for retail investors is most of these alternative investments are hard to access at low prices. Property is possible through BTL, but not without the high unsystematic risk of owning just a few similar types of property and having to do a lot of the managing yourself. You could load up on REITs as an alternative to diversify away the unsystematic risk but then there is a whole layer of cost between you and the return on the assets. Compared with some alternative investments though, the costs associated with REITs is trivial. It is an absolute classic that HF strategies typically reward those running the HF to a far greater extent than they do HF investors.

On the reasonable working assumption that all types of investments should have approximately the same risk adjusted returns, why not simply target the sources of risk and return available at low cost? Global equities are probably the best place to start as they can be accessed for peanuts, then use retail cash deposits to adjust for the desired level of risk. Job done. Not what I do, but I do occasionally ask myself why not? Especially on days when the price of oil has dramatically moved against me :cry:


The same reasoning can be applied to asset classes as well as individual shares. Buying fine art you get exposure to compensated risks (eg poor growth in China) and uncompensated risk (eg a major fraud being uncovered at Christie's). My assumption would be a large fine art holding increases risk without increasing expected return.

If asset classes aren't perfectly correlated (which they aren't), you should hold all of them in some proportion for the most effcient portfolio. You miss out on some diversification benefit being 100% equities.

The two diversifiers that most interest me are bonds and property because they large asset classes that I assume are underrepresented on the balance sheets of listed companies. If you were trying to build a portfolio of all the assets in the world weighted by value, you would be missing out important components of global wealth by leaving out property and bonds.

That doesn't apply to niche assets because you get exposure to most things in equity trackers. If you own diageo, you have exposure to the whisky market already. Even if an industry is underrepresented in listed equities, when you think of the diversity in the businesses carried on by the S&P 500, for example, one or two more isn't going to make any difference unless they are very valuable. Other than property and bonds, I can't think of any.

I think "alternatives" are marketing gimmicks that play on the fact people don't view shares as a part of a business. They give the impression that because they are offering direct ownership or a fund, the risk profile is different to listed alternatives but really it isn't. It's an illusion caused by the lack of illiquidity. Fine wine, antiques and forrestry are all cylical markets that are sensitive to macro conditions, that remains the case when those assets are held through an unquoted vehcile.

There's an unlimited amount of "alternatives" you could invent by taking any asset that businesses profit from and offering some direct exposure to it for high fees claiming it has diversification benefits.

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Re: Asset Allocation

#509030

Postby hiriskpaul » June 23rd, 2022, 12:21 pm

Sternumator wrote:
hiriskpaul wrote:It is a reasonable working assumption that asset classes, derivatives, factors, hedge fund strategies, etc. all have similar risk adjusted returns at any point in time. If that is not the case then money tends to flow towards whatever is likely to deliver the better risk adjusted return, which evens things up. I am talking about established rational stuff here, not speculative scammy crypto-babble type nonsense.

Occasionally things get missed and it can take some time for corrections to take place and money can be made when that happens, but over an extended period the returns achieved, adjusted for risk, roughly evens out. This does not necessarily apply at the individual security level where unsystematic risk comes into play, but at the level of broad categories where that unsystematic gets diversified away, so global equities (but not individual shares), fine art (but not individual pieces), property (but not individual properties) should produce similar risk adjusted returns. As discussed by SalvorHardin, the problem for retail investors is most of these alternative investments are hard to access at low prices. Property is possible through BTL, but not without the high unsystematic risk of owning just a few similar types of property and having to do a lot of the managing yourself. You could load up on REITs as an alternative to diversify away the unsystematic risk but then there is a whole layer of cost between you and the return on the assets. Compared with some alternative investments though, the costs associated with REITs is trivial. It is an absolute classic that HF strategies typically reward those running the HF to a far greater extent than they do HF investors.

On the reasonable working assumption that all types of investments should have approximately the same risk adjusted returns, why not simply target the sources of risk and return available at low cost? Global equities are probably the best place to start as they can be accessed for peanuts, then use retail cash deposits to adjust for the desired level of risk. Job done. Not what I do, but I do occasionally ask myself why not? Especially on days when the price of oil has dramatically moved against me :cry:


The same reasoning can be applied to asset classes as well as individual shares. Buying fine art you get exposure to compensated risks (eg poor growth in China) and uncompensated risk (eg a major fraud being uncovered at Christie's). My assumption would be a large fine art holding increases risk without increasing expected return.

If asset classes aren't perfectly correlated (which they aren't), you should hold all of them in some proportion for the most effcient portfolio. You miss out on some diversification benefit being 100% equities.

The two diversifiers that most interest me are bonds and property because they large asset classes that I assume are underrepresented on the balance sheets of listed companies. If you were trying to build a portfolio of all the assets in the world weighted by value, you would be missing out important components of global wealth by leaving out property and bonds.

That doesn't apply to niche assets because you get exposure to most things in equity trackers. If you own diageo, you have exposure to the whisky market already. Even if an industry is underrepresented in listed equities, when you think of the diversity in the businesses carried on by the S&P 500, for example, one or two more isn't going to make any difference unless they are very valuable. Other than property and bonds, I can't think of any.

I think "alternatives" are marketing gimmicks that play on the fact people don't view shares as a part of a business. They give the impression that because they are offering direct ownership or a fund, the risk profile is different to listed alternatives but really it isn't. It's an illusion caused by the lack of illiquidity. Fine wine, antiques and forrestry are all cylical markets that are sensitive to macro conditions, that remains the case when those assets are held through an unquoted vehcile.

There's an unlimited amount of "alternatives" you could invent by taking any asset that businesses profit from and offering some direct exposure to it for high fees claiming it has diversification benefits.

After equities bonds are the obvious next class to add to a portfolio. This would be government/investment grade bonds not the sort of junk I hold at present. They are cheap to hold and trade via collective vehicles or even directly in the case of gilts. So ticks the box of there being not too much friction between you and the source of returns. Bonds have had a great run over the last 40 years as yields have dropped. Whether that run can re-start and contimue is questionable though. They often have negative correlation with equities as well and so are able to deliver a bigger rebalancing benefit than cash, with a constant correlation of zero. Expected long term returns of bonds are lower than equities, but so is the risk. US treasuries can be good to hold for tail risks as there is ofen a flight to safety into them when wars, pandemics, financial shocks, etc come along. UK holders also benefit from a rise in the dollar which often happens with these events.

Is it worthwhile retail investors adding bonds or just sticking with equities/cash? Dunno and I am not sure it is clearcut. Outside tax shelters you can get better fixed returns on cash compared with short dated bonds. Longer dated bonds carry risk of capital losses unless held to maturity which doesn't happen with cash, but can provide the negative correlation aspects. Overall I think the long term benefits (if any) of holding bonds are likely to be marginal compared with cash and a higher allocation to equities, but short dated bonds are better than cash in SIPPs and ISAs.

Not sure about property, apart from owning your own home, which is worthwhile due to the tax breaks and imputed rent. You can pick up property companies as part of your equities allocation, but is it worthwhile overweighting property companies? I am not sure it is really as property companies tend to be correlated with equity markets anyway, so there isn't really the benefit you might get with bonds.

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Re: Asset Allocation

#511173

Postby richfool » July 1st, 2022, 2:39 pm

hiriskpaul wrote:
Sternumator wrote:
hiriskpaul wrote:It is a reasonable working assumption that asset classes, derivatives, factors, hedge fund strategies, etc. all have similar risk adjusted returns at any point in time. If that is not the case then money tends to flow towards whatever is likely to deliver the better risk adjusted return, which evens things up. I am talking about established rational stuff here, not speculative scammy crypto-babble type nonsense.

Occasionally things get missed and it can take some time for corrections to take place and money can be made when that happens, but over an extended period the returns achieved, adjusted for risk, roughly evens out. This does not necessarily apply at the individual security level where unsystematic risk comes into play, but at the level of broad categories where that unsystematic gets diversified away, so global equities (but not individual shares), fine art (but not individual pieces), property (but not individual properties) should produce similar risk adjusted returns. As discussed by SalvorHardin, the problem for retail investors is most of these alternative investments are hard to access at low prices. Property is possible through BTL, but not without the high unsystematic risk of owning just a few similar types of property and having to do a lot of the managing yourself. You could load up on REITs as an alternative to diversify away the unsystematic risk but then there is a whole layer of cost between you and the return on the assets. Compared with some alternative investments though, the costs associated with REITs is trivial. It is an absolute classic that HF strategies typically reward those running the HF to a far greater extent than they do HF investors.

On the reasonable working assumption that all types of investments should have approximately the same risk adjusted returns, why not simply target the sources of risk and return available at low cost? Global equities are probably the best place to start as they can be accessed for peanuts, then use retail cash deposits to adjust for the desired level of risk. Job done. Not what I do, but I do occasionally ask myself why not? Especially on days when the price of oil has dramatically moved against me :cry:


The same reasoning can be applied to asset classes as well as individual shares. Buying fine art you get exposure to compensated risks (eg poor growth in China) and uncompensated risk (eg a major fraud being uncovered at Christie's). My assumption would be a large fine art holding increases risk without increasing expected return.

If asset classes aren't perfectly correlated (which they aren't), you should hold all of them in some proportion for the most effcient portfolio. You miss out on some diversification benefit being 100% equities.

The two diversifiers that most interest me are bonds and property because they large asset classes that I assume are underrepresented on the balance sheets of listed companies. If you were trying to build a portfolio of all the assets in the world weighted by value, you would be missing out important components of global wealth by leaving out property and bonds.

That doesn't apply to niche assets because you get exposure to most things in equity trackers. If you own diageo, you have exposure to the whisky market already. Even if an industry is underrepresented in listed equities, when you think of the diversity in the businesses carried on by the S&P 500, for example, one or two more isn't going to make any difference unless they are very valuable. Other than property and bonds, I can't think of any.

I think "alternatives" are marketing gimmicks that play on the fact people don't view shares as a part of a business. They give the impression that because they are offering direct ownership or a fund, the risk profile is different to listed alternatives but really it isn't. It's an illusion caused by the lack of illiquidity. Fine wine, antiques and forrestry are all cylical markets that are sensitive to macro conditions, that remains the case when those assets are held through an unquoted vehcile.

There's an unlimited amount of "alternatives" you could invent by taking any asset that businesses profit from and offering some direct exposure to it for high fees claiming it has diversification benefits.

After equities bonds are the obvious next class to add to a portfolio. This would be government/investment grade bonds not the sort of junk I hold at present. They are cheap to hold and trade via collective vehicles or even directly in the case of gilts. So ticks the box of there being not too much friction between you and the source of returns. Bonds have had a great run over the last 40 years as yields have dropped. Whether that run can re-start and contimue is questionable though. They often have negative correlation with equities as well and so are able to deliver a bigger rebalancing benefit than cash, with a constant correlation of zero. Expected long term returns of bonds are lower than equities, but so is the risk. US treasuries can be good to hold for tail risks as there is ofen a flight to safety into them when wars, pandemics, financial shocks, etc come along. UK holders also benefit from a rise in the dollar which often happens with these events.

Is it worthwhile retail investors adding bonds or just sticking with equities/cash? Dunno and I am not sure it is clearcut. Outside tax shelters you can get better fixed returns on cash compared with short dated bonds. Longer dated bonds carry risk of capital losses unless held to maturity which doesn't happen with cash, but can provide the negative correlation aspects. Overall I think the long term benefits (if any) of holding bonds are likely to be marginal compared with cash and a higher allocation to equities, but short dated bonds are better than cash in SIPPs and ISAs.

Not sure about property, apart from owning your own home, which is worthwhile due to the tax breaks and imputed rent. You can pick up property companies as part of your equities allocation, but is it worthwhile overweighting property companies? I am not sure it is really as property companies tend to be correlated with equity markets anyway, so there isn't really the benefit you might get with bonds.

Upon listening to Bloomberg there seems to be some suggestion that some money is now starting to move into bonds, though that sounded like government bonds. For a retail investor, would now be the right time to think of doing that, albeit into corporate bond funds/IT's like: HDIV or BIPS?

In addition to equities, I already have a fair chunk in Property REIT's and renewables.

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Re: Asset Allocation

#511221

Postby hiriskpaul » July 1st, 2022, 7:12 pm

richfool wrote:Upon listening to Bloomberg there seems to be some suggestion that some money is now starting to move into bonds, though that sounded like government bonds. For a retail investor, would now be the right time to think of doing that, albeit into corporate bond funds/IT's like: HDIV or BIPS?

In addition to equities, I already have a fair chunk in Property REIT's and renewables.

To be pedantic I always find that "money moving into.." statement a bit quaint. Money going into oil exploration or building property I can understand, but bonds? Ignoring new issues and maturing bonds there is a finite number of bonds so for money to move into bonds an equal amount must move out. What I think they must mean is that bond holders and would be bond holders are both happy for the price to rise, so "money has gone into bonds" really just means the value of bonds has risen.

Here's a thought - there must be investors with cash or other non-bond assets who want a higher allocation to bonds than they already have. They could buy more, but alternatively if bonds rise in value compared to the other assets they hold then their allocation to bonds will rise without them having to buy more. If they do nothing, are they still considered to have "moved into bonds"?

To give a proper answer the question though, I started to "move more money into bonds" this morning with the purchase of Metro Bank 5.5% 2028 subordinated debt. There are definitely some good prices out there compared with a few months ago, but that can also be said of equities and I am planning to move money into those next week (nothing fancy, just topping up on cheap geographical tracker ETFs and funds).

Don't know much about the ITs you mention, but I am not attracted to investment grade corporates at present prices. High yield prices are looking better to me and HDIV is reported to have quite a bit in high yield. The factsheet claims the IT is at at a 10% discount to NAV, which is helpful. BIPS seems to tilt towards higher yield as well, so could be a good option. Ongoing charges of both seem a bit steep to me, but not out of the ordinary.

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Re: Asset Allocation

#511264

Postby minnow » July 1st, 2022, 11:47 pm

Must admit, I have never been entirely convinced by the case for owning corporate bonds. Yes, yields are higher (compared with a govvie of comparable maturity), but that yield doesn't come for free. AIUI, a significant part of that extra yield is the actuarial default premium, i.e. the "fair" return you expect to cover the likelihood that the bond will default. On top of that there's the credit risk premium (compensation that you expect for shouldering the uncertainty), but opinions seem to differ on how large this actually is. Most papers I've looked at suggest that the CRP is smallish, and it fluctuates in line with economic conditions. It's not really clear to me why you'd choose CRP over ERP especially when the ERP tends to be significantly larger. Not saying that corp bonds can't be a good choice for sophisticated investors, I'm sure they can, but I'm not sure your average retail investor (me included) has a good grasp of the risks they're taking on.

Talking of bonds, I just loaded up on a bit of 3TYL (3x leveraged 10Y US treasuries). At least with govvies there's one less risk to worry about ! I'm underweight bonds, and after the recent price falls I figure this may not be a bad time to top up. Not going all in, but just nibbling away with some spare cash.

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Re: Asset Allocation

#511269

Postby Wuffle » July 2nd, 2022, 4:21 am

I work on a principle that somebody is making money somewhere.
Companies pay out wages, dividends or interest to their bondholders.
I still work, which covers the wages part.
I own equity which pay dividends.
I should own some corporate bonds to cover off any leakage in that direction.

W.

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Re: Asset Allocation

#511311

Postby Sternumator » July 2nd, 2022, 10:52 am

I'm buying JHYP which is GBP hedged.

I'm probably guility of what minnow says. Looking at the YTM and thinking I'll take 7% without any idea how much of that I should knock off for defaults.

Corporate bonds are more risky than government bonds but they get paid before shareholders get anything. If you are comforable holding equities, you should be comfortable with corporate bonds.

I've also being putting money into an emerging market government bond fund. The yields are attractive and they are less correlated with equities and corporate bonds. Beta is <0.5.

I like the idea of spreading the risk around. Whether Qatar defaults on its debt surely doesn't have much to do with how US shares are doing.

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Re: Asset Allocation

#511313

Postby JohnW » July 2nd, 2022, 11:24 am

Wuffle wrote:Companies pay out wages, dividends or interest to their bondholders.
...
I should own some corporate bonds to cover off any leakage in that direction.

No great objection to corporate bonds, but I'm not sure about the logic of that one. You could skip the corporate bonds and buy more stocks, thus compensating for what you're missing in 'leaked' corporate bond coupons. It comes down to where the better risk adjusted return is I think.
If the game were fair we'd get a bit better return for a bit more risk with corporates than treasuries, but the risk adjusted return would be the same (otherwise investors would pile into the one with better risk adjusted returns thus pushing the price up and returns down until either choice would be comparable). But I think it's the case that the extra return, or premium, you get for taking on corporate bond risk over treasuries, varies with time so that you might get a better premium now than in 5 years time, or a worse one. It's a bit like the duration premium you get for buying longer term bonds; it isn't always there, and just now bond yield curves in some places are flat beyond 5 years, so you get nothing extra for taking a longer term risk.
Some will choose when to be 'in' or 'out' of corporates depending on how they see the risk premia, just as some will be in or out of long term bonds. Others will shrug, resign themselves to never knowing how the future will pan out, and hold a mixed fund.

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Re: Asset Allocation

#511340

Postby GoSeigen » July 2nd, 2022, 1:07 pm

minnow wrote:
Talking of bonds, I just loaded up on a bit of 3TYL (3x leveraged 10Y US treasuries). At least with govvies there's one less risk to worry about !


3TYL is not a government bond. It's a structured product issued as debt of a corporate counterparty probably backed by swaps (a derivative). It will lose you some 2% per annum to the compounding effect relative to the equivalent treasury unless you get very lucky with your timing. Not only that, but the product has no currency hedging so you also bear currency risk as a UK investor.

Note that the KID states clearly that this is the highest risk class investment you can buy, which belies the second part of the quoted statement above:

We have classified this product as 7 out of 7, which is the highest risk class. It rates the potential losses from future performance, based on past performance, at a very high level.


Finally note that the recommended holding period by the issuer is ONE DAY, which I agree with completely.


GS

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Re: Asset Allocation

#511409

Postby minnow » July 2nd, 2022, 7:27 pm

You're quite right GoSeigen, 3TYL is not a bond. Thanks for pointing that out, I should have been clearer. It's a ETP that gets leveraged exposure to treasuries via the futures market. It's also unhedged, as you point out. Personally I quite like the USD exposure because, in the event of an economic shock, I'd wager on the dollar rallying against sterling but I know opinions differ on that point (Monevator did a good article on that - "Do US Treasury bonds protect UK investors better than gilts?")

Intrigued by your comment about performance, I pulled some stats for IEF (Blackrock's 10Y unhedged treasury ETF). Yahoo has daily prices going back to 2002. With the assistance of LibreOffice, I then took the daily price returns and multiplied by 2x or 3x (simulating the daily reset behaviour). I then calculated the total annual return for a "simulated" leveraged ETF, going back to 2002. Here are the results :

Code: Select all

        1x     2x     3x
2003   6.14  12.02   17.57
2004   5.17  10.16   14.91
2005   2.42   4.64    6.63
2006   2.83   5.55    8.15
2007  10.84  22.42   34.72
2008  13.44  27.35   41.48
2009  -3.36  -7.35  -11.88
2010   8.75  17.58   26.37
2011  16.77  35.39   55.88
2012   2.52   4.81    6.86
2013  -5.29 -10.64  -16.01
2014   9.19  18.94   29.24
2015   1.42   2.42    2.98
2016   0.53   0.76    0.70
2017   2.26   4.39    6.37
2018   1.54   2.93    4.18
2019   8.30  16.95   25.93
2020   9.53  19.35   29.41
2021  -4.25  -8.59  -12.98
2022  -8.75 -17.13  -25.10


Most of the time, it seems that the 3x product does indeed return approximately three times the unleveraged return. Sometimes it's more, sometimes it's less, as you'd expect. Now granted, I haven't attempted to account for fees and the actual returns will undoubtedly be lower. But the numbers are in the right ballpark, I think. The key point is that vol drag isn't a significant issue when you're leveraging something that moves < 1% on an average day. I'm not getting exactly 3x the underlying, but it's close enough for my purposes. And ultimately, I get a bond-like exposure for 1/3rd of the cash that I'd otherwise have had to lock up. That's the theory at least. Whether it works in practice, time will tell !

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Re: Asset Allocation

#519266

Postby scrumpyjack » August 2nd, 2022, 7:02 pm

Bear in mind that 'shares' is basically a wrapper. The company you invest in can be doing anything so it is a mistake to compare for example shares with property. The company might just hold properties. IMO one can get sufficient diversity and spread, and the asset allocation you want, just by investing in the appropriate company shares.

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Re: Asset Allocation

#519285

Postby 1nvest » August 2nd, 2022, 7:55 pm

minnow wrote:You're quite right GoSeigen, 3TYL is not a bond. Thanks for pointing that out, I should have been clearer. It's a ETP that gets leveraged exposure to treasuries via the futures market. It's also unhedged, as you point out. Personally I quite like the USD exposure because, in the event of an economic shock, I'd wager on the dollar rallying against sterling but I know opinions differ on that point (Monevator did a good article on that - "Do US Treasury bonds protect UK investors better than gilts?")

Intrigued by your comment about performance, I pulled some stats for IEF (Blackrock's 10Y unhedged treasury ETF). Yahoo has daily prices going back to 2002. With the assistance of LibreOffice, I then took the daily price returns and multiplied by 2x or 3x (simulating the daily reset behaviour). I then calculated the total annual return for a "simulated" leveraged ETF, going back to 2002. Here are the results :

Code: Select all

        1x     2x     3x
2003   6.14  12.02   17.57
2004   5.17  10.16   14.91
2005   2.42   4.64    6.63
2006   2.83   5.55    8.15
2007  10.84  22.42   34.72
2008  13.44  27.35   41.48
2009  -3.36  -7.35  -11.88
2010   8.75  17.58   26.37
2011  16.77  35.39   55.88
2012   2.52   4.81    6.86
2013  -5.29 -10.64  -16.01
2014   9.19  18.94   29.24
2015   1.42   2.42    2.98
2016   0.53   0.76    0.70
2017   2.26   4.39    6.37
2018   1.54   2.93    4.18
2019   8.30  16.95   25.93
2020   9.53  19.35   29.41
2021  -4.25  -8.59  -12.98
2022  -8.75 -17.13  -25.10


Most of the time, it seems that the 3x product does indeed return approximately three times the unleveraged return. Sometimes it's more, sometimes it's less, as you'd expect. Now granted, I haven't attempted to account for fees and the actual returns will undoubtedly be lower. But the numbers are in the right ballpark, I think. The key point is that vol drag isn't a significant issue when you're leveraging something that moves < 1% on an average day. I'm not getting exactly 3x the underlying, but it's close enough for my purposes. And ultimately, I get a bond-like exposure for 1/3rd of the cash that I'd otherwise have had to lock up. That's the theory at least. Whether it works in practice, time will tell !

Example of real world 12.5 years of third in 3x, third in short term, deleveraging of a long dated treasury 3x

PV

Note that for 3x you have to rebalance every quarter, or maybe 6 monthly. For 2x you can generally get away with once yearly rebalancing. Pushed to Zvi Bodie's 10x style (10% in 10x leveraged equivalent Options) and you have to rebalance monthly. i.e. the greater the leverage the greater the volatility and the quicker 33/67 weightings will drift to 50/50 or 10/90 or whatever.

Think of it as for every £1 you deposit into a 3x fund they borrow another £2 and buy £3 of exposure. So if you invest only a third and lend the other two thirds then that is somewhat like you also lending to the fund in order for it to scale up its exposure. If instead you can achieve a higher rate of return on the £2 then that enhances overall outcome (or acts as a drag if you achieve a lower rate of return). Sound simple/easy to do, but in practice doing so consistently isn't anywhere near as simple/easy.

This maybe PV i.e. a Permanent Portfolio held via de-leveraged 3x holdings, where the otherwise 75% 'cash' is invested in a 33/67 small cap value/cash type 'Larry Portfolio'.


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