Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

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northernangel
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Joined: Mon Feb 11, 2019 12:38 pm

Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by northernangel » Thu May 09, 2019 3:36 pm

Hello, I'm torn between VUCP.L https://www.vanguardinvestor.co.uk/inve ... _fund_link and
Vanguard's U.K. Investment Grade Bond Index Fund - Income https://www.vanguardinvestor.co.uk/inve ... tributions

My question as a beginning UK Investor is about the currency risk exposure between these two - although VUCP.L yields 3.56% pcm (TER 0.12), versus the lower UK Bond Fund yield 2.55% quarterly (TER 0.15), does the currency risk of owning VUCP outweigh it's higher yield? Would I be better to invest in the UK Bond Fund ie my home country currency?

Also I prefer ETF's to Funds because I like to know the price before buying too... I see there's another ETF that offers maybe similar to the Vanguard UK Investment Grade Bond Index Fund: SLXX.L TER 0.2 (higher) https://www.ishares.com/uk/individual/e ... -ucits-etf

Grateful for your thoughts,

northernangel

QuantOfAsia
Posts: 23
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Location: Hong Kong

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by QuantOfAsia » Thu May 09, 2019 7:04 pm

If the primary reason you're buying a bond ETF is to earn some income while minimizing how much your investment fluctuates in the currency you spend, there's really no point buying foreign bonds with a slightly higher yield. If the currency moves 5-10% against you, will the extra 1-2% in yield have been worth it? For that reason, I often think you're just as well buying foreign stocks as unhedged foreign bonds.

You can diversify away from GBP bonds by buying bond ETFs that hedge back into GBP - here iShares does tend to be a bit clearer than Vanguard in their descriptions.

andrew99999
Posts: 346
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Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by andrew99999 » Thu May 09, 2019 9:09 pm

I would be careful using returns for investment grade bonds as a reason to choose.

The different in returns of the same level of quality/duration of bonds in different countries reflects the forward expected change in purchasing power. So if currency A gives 3% and currency B gives 1% then the difference is the loss in purchasing power currency A is expecting vs currency B, so even though they are different percent numbers, there is no free lunch.

On top of this you are introducing currency risk. Bonds are for stability, and if it is not in your home currency, you are are missing the point of bonds.

If you want your portfolio to earn more money, and are happy to take more risk, then increase your equities allocation compared to your bond allocation.

xxd091
Posts: 52
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Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by xxd091 » Sat May 11, 2019 6:37 pm

UK Investor here. Bonds are for stability in a Portfolio
Equities do the heavy lifting
I use Vanguard Global Bond Index Fund (Hedged to the Pound)
Made 5%pa over the last 10 years -will it do the same going forward-doubtful
xxd091


Valuethinker
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Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Sun May 12, 2019 6:17 am

YRT70 wrote:
Sun May 12, 2019 3:38 am
Here's what Vanguard recommends: https://personal.vanguard.com/pdf/ISGGLBD.pdf
Thank you!

Useful.

YRT70
Posts: 83
Joined: Sat Apr 27, 2019 8:51 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by YRT70 » Sun May 12, 2019 7:59 am

Valuethinker wrote:
Sun May 12, 2019 6:17 am
YRT70 wrote:
Sun May 12, 2019 3:38 am
Here's what Vanguard recommends: https://personal.vanguard.com/pdf/ISGGLBD.pdf
Thank you!

Useful.
My pleasure. What do you think of their advice? (global bonds hedged to local currency)

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Sun May 12, 2019 9:26 am

YRT70 wrote:
Sun May 12, 2019 7:59 am
Valuethinker wrote:
Sun May 12, 2019 6:17 am
YRT70 wrote:
Sun May 12, 2019 3:38 am
Here's what Vanguard recommends: https://personal.vanguard.com/pdf/ISGGLBD.pdf
Thank you!

Useful.
My pleasure. What do you think of their advice? (global bonds hedged to local currency)
Almost certainly correct.

If UK gilt yields were significantly higher and non UK gilt yields the same I would consider using a gilt index fund.

As it is the gilt index has a duration 4 to 5 years longer than the average government bond index and yields are really low right now ( c 1.5 per cent). So more interest risk and a lousy yield. And I suspect more of the same post Brexit.

YRT70
Posts: 83
Joined: Sat Apr 27, 2019 8:51 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by YRT70 » Sun May 12, 2019 11:07 am

Valuethinker wrote:
Sun May 12, 2019 9:26 am
Almost certainly correct.

If UK gilt yields were significantly higher and non UK gilt yields the same I would consider using a gilt index fund.

As it is the gilt index has a duration 4 to 5 years longer than the average government bond index and yields are really low right now ( c 1.5 per cent). So more interest risk and a lousy yield. And I suspect more of the same post Brexit.
Good to know. I'm thinking of using the Vanguard Global Bond index fund as my only bonds.

Can you comment on my situation, specifically bond allocation?
viewtopic.php?f=10&t=280924&p=4540322#p4540322

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Sun May 12, 2019 11:25 am

YRT70 wrote:
Sun May 12, 2019 11:07 am
Valuethinker wrote:
Sun May 12, 2019 9:26 am
Almost certainly correct.

If UK gilt yields were significantly higher and non UK gilt yields the same I would consider using a gilt index fund.

As it is the gilt index has a duration 4 to 5 years longer than the average government bond index and yields are really low right now ( c 1.5 per cent). So more interest risk and a lousy yield. And I suspect more of the same post Brexit.
Good to know. I'm thinking of using the Vanguard Global Bond index fund as my only bonds.

Can you comment on my situation, specifically bond allocation?
viewtopic.php?f=10&t=280924&p=4540322#p4540322
Firecalc.

That's for an American investor?

Don't give your age or any other detail?

Really can't make a sensible comment.

My gut says never be less than 25 per cent or more than 75 per cent in bonds. Could make it 20 80.

YRT70
Posts: 83
Joined: Sat Apr 27, 2019 8:51 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by YRT70 » Sun May 12, 2019 11:31 am

Valuethinker wrote:
Sun May 12, 2019 11:25 am
Firecalc.

That's for an American investor?
Does that matter a lot? I find that side of the forum way more active, which is why I posted it there.
Don't give your age or any other detail?
Close to 50, mentioned there. Planning to live another 40 years ;) Thanks for the feedback.

xxd091
Posts: 52
Joined: Sun Aug 21, 2011 4:41 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by xxd091 » Sun May 12, 2019 2:02 pm

72- been retired 16 years
Made my pile
Asset Allocation- 30% Equities 65% Bonds 5% Cash
Depends how much risk you want to take and have you saved enough?
xxd091

Valuethinker
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Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Tue May 14, 2019 2:41 am

YRT70 wrote:
Sun May 12, 2019 11:31 am
Valuethinker wrote:
Sun May 12, 2019 11:25 am
Firecalc.

That's for an American investor?
Does that matter a lot? I find that side of the forum way more active, which is why I posted it there.
Don't give your age or any other detail?
Close to 50, mentioned there. Planning to live another 40 years ;) Thanks for the feedback.
US stock returns have been higher than almost any other country. That will bias the results. Also US bond yields are currently much higher than Japan, UK, Eurozone, so again that distorts the results.

US Social Security is significantly more generous than UK state pension. Another important difference. On the other hand Americans have issues with what medical insurance does and does not cover. Up until age 65 they have to stay privately insured, after that there are things Medicare does not cover.

From that post you are aiming for 100% stocks? I think that's recency bias -- the UK 1973-74 underscores the problems with that approach. But to each his or her own.

YRT70
Posts: 83
Joined: Sat Apr 27, 2019 8:51 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by YRT70 » Tue May 14, 2019 8:52 am

Valuethinker wrote:
Tue May 14, 2019 2:41 am
From that post you are aiming for 100% stocks?
No. Firecalc is suggesting that about 85% stocks was the most optimal for most of my scenarios.

If I use the same numbers on Vanguard's MC tool I get about ~60-70% stocks as optimal.

I'm new to using all these tools so not sure what to make of them. I might go 70-80% stocks. But then again now I'm reading about how the CAPE valuations might mean poor returns for the next 10 years so I'm not sure what to make of it. Currently I'm 40% stocks and 60% cash, so it would be nice to make decisions.

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Tue May 14, 2019 9:26 am

YRT70 wrote:
Tue May 14, 2019 8:52 am
Valuethinker wrote:
Tue May 14, 2019 2:41 am
From that post you are aiming for 100% stocks?
No. Firecalc is suggesting that about 85% stocks was the most optimal for most of my scenarios.

If I use the same numbers on Vanguard's MC tool I get about ~60-70% stocks as optimal.

I'm new to using all these tools so not sure what to make of them. I might go 70-80% stocks. But then again now I'm reading about how the CAPE valuations might mean poor returns for the next 10 years so I'm not sure what to make of it. Currently I'm 40% stocks and 60% cash, so it would be nice to make decisions.
The problem with all these calculators is that their outputs are determined by their inputs.

What happened in 2008-09 reminded us that equity volatility is not over. Bear markets are not always just painful (minus 35% 2000-03) sometimes they are absolutely brutal (50% in less than a year). Of course the recovery to (almost) the bull market of all time since (and the -10 year numbers look particularly impressive given that March 2009 was the absolute bottom) has "taught" us a "lesson" that markets "always" recover. Hint: they don't. Japan is still waiting post 1990. 1929 the market did not recover until the 1940s. 1968 not until the 1980s. And using US data (the 3rd best performing market of the 1900-2016 period) distorts things.

Bond yields are the lowest they have ever been for this long, in the UK & Europe, although also in the USA (where they are higher). Logically, you can't have a world where bond returns are really low and stock returns are really high, that goes on forever (companies can, and do, substitute debt for equity; and whilst companies are substituting low return debt for equity, investors are loading up high return equity not low return debt - eventually the thing has to come into balance).

So I am much more trusting of the Vanguard numbers. There's a world of merit in 60 equities - 40 bonds. 70 -30 opens up the possibility that the investor will hit one of those bear markets (say bonds down 10%, equities down 50%) and panic out of equities. The additional volatility is painful.

Given where you are you should consider going to 60-65% equities. Bonds v. cash is difficult because the yields are not much different right now. But in the long run you are going to want to have held bonds because the long run difference in returns between bonds and cash is typically 1-2% a year, say, and compound that over 30 years and it's a lot of money. Short Term Bonds may be a reasonable compromise.

We have to accept that we are in a world of low prospective returns on bonds and therefore most likely on equities. 3% real returns on equities going forward is not bad, and 5% is about the global average 1900-2016 in USD terms.

YRT70
Posts: 83
Joined: Sat Apr 27, 2019 8:51 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by YRT70 » Wed May 15, 2019 8:03 am

Valuethinker wrote:
Tue May 14, 2019 9:26 am
The problem with all these calculators is that their outputs are determined by their inputs.

What happened in 2008-09 reminded us that equity volatility is not over. Bear markets are not always just painful (minus 35% 2000-03) sometimes they are absolutely brutal (50% in less than a year). Of course the recovery to (almost) the bull market of all time since (and the -10 year numbers look particularly impressive given that March 2009 was the absolute bottom) has "taught" us a "lesson" that markets "always" recover. Hint: they don't. Japan is still waiting post 1990. 1929 the market did not recover until the 1940s. 1968 not until the 1980s. And using US data (the 3rd best performing market of the 1900-2016 period) distorts things.

Bond yields are the lowest they have ever been for this long, in the UK & Europe, although also in the USA (where they are higher). Logically, you can't have a world where bond returns are really low and stock returns are really high, that goes on forever (companies can, and do, substitute debt for equity; and whilst companies are substituting low return debt for equity, investors are loading up high return equity not low return debt - eventually the thing has to come into balance).

So I am much more trusting of the Vanguard numbers. There's a world of merit in 60 equities - 40 bonds. 70 -30 opens up the possibility that the investor will hit one of those bear markets (say bonds down 10%, equities down 50%) and panic out of equities. The additional volatility is painful.

Given where you are you should consider going to 60-65% equities. Bonds v. cash is difficult because the yields are not much different right now. But in the long run you are going to want to have held bonds because the long run difference in returns between bonds and cash is typically 1-2% a year, say, and compound that over 30 years and it's a lot of money. Short Term Bonds may be a reasonable compromise.

We have to accept that we are in a world of low prospective returns on bonds and therefore most likely on equities. 3% real returns on equities going forward is not bad, and 5% is about the global average 1900-2016 in USD terms.
Thanks for your comments Valuethinker. I appreciate it.

60/40 seems like a good safety option to me. I might be tempted to go up to 70/30.

My reasoning is this: I'm still relatively young (47). If I hit a bear market early on I might be more motivated to make some extra money. Does that sounds like a sensible reason to be a a bit more risk tolerant?

On a sidenote: I am talking as if I might be going to 70/30 but in reality, so far, I haven't gone further than 400k stock allocation yet. I'm already having a little cold feet. Reading all these stories about high CAPE valuations has amde me a bit more cautious. Which could be a good thing.

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Wed May 15, 2019 11:33 am

YRT70 wrote:
Wed May 15, 2019 8:03 am
Valuethinker wrote:
Tue May 14, 2019 9:26 am
The problem with all these calculators is that their outputs are determined by their inputs.

What happened in 2008-09 reminded us that equity volatility is not over. Bear markets are not always just painful (minus 35% 2000-03) sometimes they are absolutely brutal (50% in less than a year). Of course the recovery to (almost) the bull market of all time since (and the -10 year numbers look particularly impressive given that March 2009 was the absolute bottom) has "taught" us a "lesson" that markets "always" recover. Hint: they don't. Japan is still waiting post 1990. 1929 the market did not recover until the 1940s. 1968 not until the 1980s. And using US data (the 3rd best performing market of the 1900-2016 period) distorts things.

Bond yields are the lowest they have ever been for this long, in the UK & Europe, although also in the USA (where they are higher). Logically, you can't have a world where bond returns are really low and stock returns are really high, that goes on forever (companies can, and do, substitute debt for equity; and whilst companies are substituting low return debt for equity, investors are loading up high return equity not low return debt - eventually the thing has to come into balance).

So I am much more trusting of the Vanguard numbers. There's a world of merit in 60 equities - 40 bonds. 70 -30 opens up the possibility that the investor will hit one of those bear markets (say bonds down 10%, equities down 50%) and panic out of equities. The additional volatility is painful.

Given where you are you should consider going to 60-65% equities. Bonds v. cash is difficult because the yields are not much different right now. But in the long run you are going to want to have held bonds because the long run difference in returns between bonds and cash is typically 1-2% a year, say, and compound that over 30 years and it's a lot of money. Short Term Bonds may be a reasonable compromise.

We have to accept that we are in a world of low prospective returns on bonds and therefore most likely on equities. 3% real returns on equities going forward is not bad, and 5% is about the global average 1900-2016 in USD terms.
Thanks for your comments Valuethinker. I appreciate it.

60/40 seems like a good safety option to me. I might be tempted to go up to 70/30.

My reasoning is this: I'm still relatively young (47). If I hit a bear market early on I might be more motivated to make some extra money. Does that sounds like a sensible reason to be a a bit more risk tolerant?

On a sidenote: I am talking as if I might be going to 70/30 but in reality, so far, I haven't gone further than 400k stock allocation yet. I'm already having a little cold feet. Reading all these stories about high CAPE valuations has amde me a bit more cautious. Which could be a good thing.
If you have GBP 100 invested. 70 equities (global equity index), 30 bonds.

And equities drop 50%. Bonds 10%. So now you have 35 E + 27 B = 62 GBP

Most of us would struggle to imagine, in advance, how that would feel. But it is a pretty horrible experience.

If you are still putting money into the market you can "buy cheap" - and you can rebalance. You'd be amazed how hard that is. Except for a simple fact of the UK tax year (5th April) and using my pension allowance, I would not have bought stocks in Dec 2008 and March 2009. I would certainly not have had the guts to rebalance into stocks from bonds.

I just shut off my computer and stopped looking at portfolio valuations - a rabbit in the headlights.

Believe it or not it was worse in 2000-03. Market fall was less, but it just went on and on and on.

I cannot begin to imagine what Japan must have been like the last 30 years. Or the 1930s in the markets - there were these huge rallies, followed by collapses.

My advice to you would be to set your target weighting and move to it. You could lose a lot of upside waiting for CAPE to be "reasonable" again. But don't go so far into equities that if and when we hit that bear market (and we shall but I don't know whether it starts now, or whether the market is 20,30, 40% higher than it is now when we do) then you lose your nerve.

Shrug. It's also a reasonable strategy to do half now and half in 6 months, say.

There are event risks around the UK

- Brexit - hard or soft? My view is the exchange rate does not discount a hard Brexit, and I would expect another 10% fall in GBP. The market is assuming a degree of rationality around the political system which it is inappropriate to assume at this point

- fall of government/ General Election - my view is the market is not fully discounting the Official Opposition forming the government, with radical changes in UK economic policy (depends too whether minority or majority govt). The XR could go down 10% or it could go down a lot more e.g. to dollar parity

This has led me to reduce UK gilt holdings in my pension (which bear full UK exchange rate risk) and switch to global equity funds as a hedge against either of the 2 events.

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Wed May 15, 2019 11:46 am

viewtopic.php?f=10&t=25126&start=300

everybody should read this thread from the beginning as a salutary reminder of what 2008-09 was like (also Market Timer thread on losing money in markets).

In my own experience 2000-03 was worse. Partly because I lost my job in the dot com downturn. But also because the bear market just went on, and on, and on.

Topic Author
northernangel
Posts: 10
Joined: Mon Feb 11, 2019 12:38 pm

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by northernangel » Wed May 15, 2019 5:36 pm

xxd091 wrote:
Sat May 11, 2019 6:37 pm
UK Investor here. Bonds are for stability in a Portfolio
Equities do the heavy lifting
I use Vanguard Global Bond Index Fund (Hedged to the Pound)
Made 5%pa over the last 10 years -will it do the same going forward-doubtful
xxd091
Helpful product suggestion - thank you. Looking at EM Gov Bonds next, then iShares EMHG https://www.ishares.com/uk/individual/e ... edged-fund which is Hedged UK£ would be preferable to Vanguard's VEMT (Unhedged)?
https://www.vanguardinvestor.co.uk/inve ... _fund_link

And am I comparing two similar etf's?

Thanks,

Northern

andrew99999
Posts: 346
Joined: Fri Jul 13, 2018 8:14 pm

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by andrew99999 » Wed May 15, 2019 8:17 pm

Valuethinker wrote:
Wed May 15, 2019 11:46 am
viewtopic.php?f=10&t=25126&start=300

everybody should read this thread from the beginning as a salutary reminder of what 2008-09 was like (also Market Timer thread on losing money in markets).

In my own experience 2000-03 was worse. Partly because I lost my job in the dot com downturn. But also because the bear market just went on, and on, and on.
Always appreciate the perspective of those who have been through the big ones.
It's impossible to really comprehend for the rest of us, but even without fully comprehending it, these explanations are a big help.

Valuethinker
Posts: 37882
Joined: Fri May 11, 2007 11:07 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by Valuethinker » Fri May 17, 2019 2:37 am

northernangel wrote:
Wed May 15, 2019 5:36 pm
xxd091 wrote:
Sat May 11, 2019 6:37 pm
UK Investor here. Bonds are for stability in a Portfolio
Equities do the heavy lifting
I use Vanguard Global Bond Index Fund (Hedged to the Pound)
Made 5%pa over the last 10 years -will it do the same going forward-doubtful
xxd091
Helpful product suggestion - thank you. Looking at EM Gov Bonds next, then iShares EMHG https://www.ishares.com/uk/individual/e ... edged-fund which is Hedged UK£ would be preferable to Vanguard's VEMT (Unhedged)?
https://www.vanguardinvestor.co.uk/inve ... _fund_link

And am I comparing two similar etf's?

Thanks,

Northern
You can add more esoteric forms of risk for as long as you want.

EM Bonds? There are countries like China which are undoubtedly better credit risks than most developed government bond markets.

But there is also contagion risk. Have we so soon forgotten 1997-1998? The default of a Thai property company led to a succession of crises - thousands dying in rioting in Indonesia, arrest warrant for George Soros in Malaysia, currency crisis in Brazil, Russian default, collapse of Long Term Capital Management and a Fed-orchestrated wind up of the fund.

Before that of course we had Mexico in 1994. And successive crises in the early 1980s - in those days it was direct lending to governments rather than bonds - but the defaults could have brought down the whole banking system.

EM bonds have macro risk. When she blows, she really blows.

xxd091
Posts: 52
Joined: Sun Aug 21, 2011 4:41 am

Re: Torn between Bonds: VUCP.L and Vanguard U.K. Investment Grade Bond Index Fund - Income UK Investor

Post by xxd091 » Fri May 17, 2019 2:52 am

Always remember to keep some cash on hand
1-2 years expenses is a reasonable rule
You will find that Bond Funds can go down with Equity Funds at the same time though not nearly as much
Saves you selling Bonds at a down
More applicable scenario for retirees as they might not have a big enough cash flow from other sources for day to day expenses
Sheepdog has an impressive thread on this scenario
xxd091

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