Bond fund options for UK investors

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dreambig
Posts: 1
Joined: Mon Apr 08, 2019 9:46 pm

Bond fund options for UK investors

Post by dreambig »

Hi all,

Have a question regarding bond fund options for UK-based investors (technically I'm an expat but I keep my assets in the UK). 33 years old with a comfortable income but only just getting started with investment.

I see a lot of people recommending UK government bond funds here to British investors. What is the reason for investing in these when they currently yield rates of only 1.5% (i.e. below inflation)? At those rates, cash in a current account seems more preferable. Or is there something I'm missing?

Are there any suitable corporate bond funds for UK investors looking to increase the yield a bit?

Thank you.
TedSwippet
Posts: 3167
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Bond fund options for UK investors

Post by TedSwippet »

Welcome.

You're right that cash savings accounts can currently beat gilts. For my non-pension cash holdings I use a 'ladder' of short term savings bonds, typically just one year but some 18 month ones. Over time, I've found that I'm using more and more Shariah accounts. Strictly these don't guarantee a rate, they just have a target, and that's usually a touch higher than the guaranteed rates from interest-bearing non-Shariah bonds. So far, every Shariah account I've used has performed exactly as promised. That way I can wring a little more from this cash, then.

For bond in a pension though, cash accounts are pretty much out of the question, and here you are more or less pushed into some form of bond holding. I use a mix of corporate bonds, plain gilts and index linked gilts in approximately equal proportions. You need to be careful with gilt fund yield numbers, since these don't tell the whole story. For example, index linked gilts have a tiny coupon (yield) but rise in value with inflation as a capital gain, so most of their return comes from the latter. You get no sense of that if you read the gilt (or gilt fund's) information pack though, not least because it is all un-quantifiable and in the future.

Over the past six or seven years my index linked gilt funds have performed as well as or better than several of my stock funds (including the FTSE all-share one), and the plain gilts are slow and plodding as expected. Corporate bonds sit in the middle; they're bonds, but because they're not issued by an entity that cannot go broke, they have a few stock-like risks in them. This forces them to offer slightly higher yields.

As for how to invest, a savings bond ladder seems to beat plain gilts but can be impractical if you have to use pensions. In that case, Vanguard and Legal & General are the two best gilt fund providers I have found. Both plain and index linked can be had for around 0.15% TER. If you have to use ETFs, the choices are a bit thinner and the TERs a bit higher. Maybe iShares IGLT and INXG, with TERs around 0.2-0.25%. For corporate bonds, the only decent fund I've found is in my ex-employer pension, so not widely available. However, the iShares SLXX ETF is pretty good all round, or IS15 if you want a shorter duration.
minimalistmarc
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Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

Hi Ted, what about VGOV as a stand-alone holding for the bond investment?
Valuethinker
Posts: 41155
Joined: Fri May 11, 2007 11:07 am

Re: Bond fund options for UK investors

Post by Valuethinker »

minimalistmarc wrote: Tue Apr 09, 2019 3:06 am Hi Ted, what about VGOV as a stand-alone holding for the bond investment?
https://www.vanguard.co.uk/adviser/adv/ ... ##overview

Vanguard UK gilt fund. Generally when posting it's best not to just use the ticker code, most people don't carry them around in their heads.

There's nothing intrinsically wrong with this.

The gilt index has very long duration and average maturity so quite sensitive to yield changes. The gilt index has the longest of these 2 parameters of any government bond market by some way.

If there is a change in government I expect straight bonds to do poorly and index-linked gilts to do well. Obviously the Brexit situation muddies the water. Even if there is simply a change in PM but not governing party there is a significant risk of an ultra being chosen as PM which I think would hurt the currency and the bond market (I am deliberately avoiding names so as not to get too political).

Thus I would say don't put all your eggs in one basket. Hold some percentage as Short Term gilts.

In truth, I would prefer to hold US Treasury bonds at the current time due to the higher yield. Despite the exchange rate risk. If you are more than 10 years from retirement I think that volatility can be born. Neither Eurozone government bonds nor gilts are particularly attractive.

In my pensions I hold ST gilt funds or ST bond funds, hedged into GBP. That is what is available.
minimalistmarc
Posts: 1057
Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

Thanks for that answer. Is it not likely that a labour government is priced into the bond price? I though bond values were even more efficient than shares?

I’m very lazy and it hurts my eyes to see more than 2 ETF holdings in my portfolio, so looking for the the best overall government bond ETF.

I’m 100% all world equity at the moment but in the next few years might go 80:20

Premium bonds look good, shame about the 50k limit
Valuethinker
Posts: 41155
Joined: Fri May 11, 2007 11:07 am

Re: Bond fund options for UK investors

Post by Valuethinker »

minimalistmarc wrote: Tue Apr 09, 2019 3:45 am Thanks for that answer. Is it not likely that a labour government is priced into the bond price? I though bond values were even more efficient than shares?

I’m very lazy and it hurts my eyes to see more than 2 ETF holdings in my portfolio, so looking for the the best overall government bond ETF.

I’m 100% all world equity at the moment but in the next few years might go 80:20

Premium bonds look good, shame about the 50k limit
Let's say there is a 50% probability of a change in government (this site prohibits politics discussions, so I am deliberately not naming parties or future PMs, etc).

Let's say in equilibrium that would cause a 1% rise in bond yields.

Then the market right now would efficiently price in a 0.5% change in bond yields.

However if it happens it will then move quite quickly to 1.0%. That's what market efficiency means - reacts to all publicly available information.

The name of, the party of, and the policies of our next PM are not known at this time, so the market is not being inefficient by not fully pricing them in. One can have a view that a change of party in power might bring a significant change in the risk of higher inflation/ lower currency.

You are taking a bigger risk by being 100% in equities vs. having your bonds in a UK gilt index fund vs other bond options. So if you are going to 80-20 that would tend to lower your portfolio risk.

BTW on a change of government the currency will swing far more, and faster, than the bond market. That's how markets tend to price in these changed conditions. Some say the risk of a hard Brexit is priced in, I think the currency would drop 10% if we had a hard Brexit. Or if we changed governments -- 10% down would be the knee jerk reaction, and would happen during the campaign as the market can read opinion polls, too.

My own opinion, and it's worth what you paid for it, is that the risk-reward on the UK government bond market right now is not favourable. There's a yield below inflation, and there's structurally long duration and maturity, and there's political risk.
minimalistmarc
Posts: 1057
Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

Thanks.

I’ll probably start with using my wife and i’s premium bonds allowance.

Anybody know of a good total world bond etf?
DJN
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Joined: Mon Nov 20, 2017 12:30 am

Re: Bond fund options for UK investors

Post by DJN »

Hi,
have a look here; two typical options,one global aggregate and one global govt, one accumulating and one distributing and both hedged https://www.bogleheads.org/wiki/EU_investing
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
danielbird193
Posts: 36
Joined: Thu Mar 21, 2019 2:15 pm

Re: Bond fund options for UK investors

Post by danielbird193 »

I use the Vanguard Global Bond Index Fund GBP Hedged (https://www.vanguardinvestor.co.uk/inve ... _fund_link).

It has a good spread of sovereign and corporate issuers diversified by credit rating and issuer. The GBP hedged share class means there's no currency risk. Low ongoing charges of 0.15%. Most importantly it has a very low correlation to global equities so provides me with that 'downside protection' which is my key aim when investing in bonds.

Vanguard also offer a short duration version of the same product (2.8 year average duration compared to 8.2 years for the standard version) which may be of interest if you're particularly worried about rate rises (https://www.vanguardinvestor.co.uk/inve ... _fund_link). The short duration version has much lower volatility (0.92% 3 year volatility compared to 2.55% for the standard version), but of course concurrently much lower returns.
minimalistmarc
Posts: 1057
Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

I need an ETF rather than a fund.

Why are the global bonds always hedged?

With equities I avoid hedging and would rather do the same with global bonds, unless there is a good reason to do it.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Bond fund options for UK investors

Post by Valuethinker »

minimalistmarc wrote: Wed Apr 10, 2019 3:52 am I need an ETF rather than a fund.

Why are the global bonds always hedged?

With equities I avoid hedging and would rather do the same with global bonds, unless there is a good reason to do it.
with bonds the volatility in exchange rates dwarfs the returns for bonds. Thus an unhedged global bond fund is a currency play, not a fixed income investment.

With equities the long run assumption is that purchasing power parity holds. High inflation countries (relatively) experience currency depreciation. Thus there is no particular reason to incur the costs of hedging the portfolio.

Usually you have a choice of hedging into USD, EUR or GBP. It really depends which you think is your "home" currency (currency in which you are most likely to spend your retirement money).

If in doubt, you could split it 50% USD & 50% GBP hedged.
minimalistmarc
Posts: 1057
Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

Good news. Vanguard U.K. have released a hedged global bond ETF - VAGP

Can’t find it on HL yet but I’m sure it will be widely available
glorat
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Joined: Thu Apr 18, 2019 2:17 am

Re: Bond fund options for UK investors

Post by glorat »

minimalistmarc wrote: Sat Jun 29, 2019 12:35 pm Good news. Vanguard U.K. have released a hedged global bond ETF - VAGP

Can’t find it on HL yet but I’m sure it will be widely available
It only launched a couple of weeks ago with minimal trading volume since then. It is likely the future for those using ETFs but I'm not putting my money there yet.

For ETF for global bonds hedged to GBP there is only one good option - AGBP by iShares. That's where I have my bond money for now
minimalistmarc
Posts: 1057
Joined: Fri Jul 24, 2015 4:38 pm

Re: Bond fund options for UK investors

Post by minimalistmarc »

glorat wrote: Sat Jun 29, 2019 11:58 pm
minimalistmarc wrote: Sat Jun 29, 2019 12:35 pm Good news. Vanguard U.K. have released a hedged global bond ETF - VAGP

Can’t find it on HL yet but I’m sure it will be widely available
It only launched a couple of weeks ago with minimal trading volume since then. It is likely the future for those using ETFs but I'm not putting my money there yet.

For ETF for global bonds hedged to GBP there is only one good option - AGBP by iShares. That's where I have my bond money for now
Are these 2 ETFs identical?

All I need now is an accumulating option for VWRL for my ISAs and SIPPs
glorat
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Joined: Thu Apr 18, 2019 2:17 am

Re: Bond fund options for UK investors

Post by glorat »

minimalistmarc wrote: Sun Jun 30, 2019 4:21 am
Are these 2 ETFs identical?

All I need now is an accumulating option for VWRL for my ISAs and SIPPs
They are both tracking the same Barclays Global Aggregate Bond index and both fx hedged to GBP and both have a 0.1% expense ratio. So to me they are basically the same specification except one has been around a long time with lots of assets under management and one is brand new.

IIRC, iShares can replicate VWRL in an accumulating manner with two ETFs in the right ratios: IWDA/EIMI in approx 88/12 ratio. But then you're trading off auto accumulation versus two ETFs that need balacing vs the benefits of the vanguard brand and structure

[Edited for the iShares ETFs info]
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