Uk corporate bonds

[Sydneycraig]

Your thoughts on the current situation for buying a fund of mixed corporate bonds. Will interest rates be rising and so best to hold off?

[fletchsmile]

Interest Rates:

UK interest rates can't go much lower, which means potential for bond price increases is limited. There's a good chance interest rates will rise in 2015, particularly if and when the US FED starts raising interest rates. When that happens bonds will fall. I'd expect rate rises to be gradual.

Nothing is guaranteed though, and if the economies suffer set backs don't be surprised for US and UK etc to keep rates lower for longer, and perhaps even revert to further QE. So the timing of rate rises is not guaranteed. Eventually it will happen though.

Buying Corp Bonds:

That means you're essentially looking at the higher yield on corporate bonds vs cash shorter term, i.e making money short term but longer term risking capital losses. Given rises should be gradual that would give time to reposition yourself.

Aside from interest rates you have the questions of where else would you put your money if not bonds. Cash looks poor value short term. Also for a diversified portfolio you want to hold some bonds. There are also other factors such as your risk tolerance, time frame, objectives (eg are you seeking income), currencies, default rates and expectations etc. Put all these together and different people's answers will vary

My approach and a few examples:

Historically I've always favoured equities. As I get older though I've been adding to fixed income holdings. I would like to add more, but have been doing so slower than I would ideally like because of the risks you highlight. I have been adding to fixed income holdings selectively when opportunities come up, even though slower than I'd like.

My preference for adding is shorter/medium term dated bonds (preferably under 5 years), with higher yields. These will be less impacted when rates do start rising than longer dated and lower yields. I see no attraction in gilts hence corporate bonds as you mention. Also I'm at least getting paid reasonably (compared to cash) well pending when rates do rise. I'm not particularly worried on default rates.

Holdings I've added in the last year or so:

- Co-operative Bank bonds - added in mid 2013 - these were speculative and I bought after the price dropped significantly last year on default risk. They were yielding 15%. They have been restructured though. After restructuring they are now on the parent company and pay an 11% coupon on a price of about 120, for an effective 9% yield until 2025. I also have a small capital gain. That was an example of a speculative opportunity, and also longer date than I was normally looking at, but at those high yields I thought worth it. Still are in my view locking in 9% for 10 years I'm OK to hold.

- Royal London Sterling Extra Yield fund - added this month - to increase bond holdings - the fund has no initial charge if bought thru someone like Hargreaves Lansdown, and an annual charge of just over 0.3%, with yield of over 6%. Also on their top150 list. About 60% UK is in corp bonds and the rest international bonds etc. Around 40% is under 5yr, and a further 30% under 10. Most is non-investment grade or non-rates. It's a well managed fund, with a reasonably flexible mandate and good performance history both for discrete and cumulative periods.

- AHYGS - iShares Asian High Yield Bond Index ETF - added recently when the yield was around 7%. Carries a 0.5% fee. Now a bit lower:

http://www.bloomberg.com/quote/AHYGS:SP

Obviously not UK. Asia focused, with 40%+ in China. I bought the SGD version. Given I live in Thailand I expect the currencies to better correlate with THB than GBP. But for someone in the UK their currency attitude may differ. The bonds are high yield so almost non are investment grade. But at this stage I'm not worried about default risk. I bought for the yield as part of a wider investment portfolio to get some more fixed interest exposure. I wouldn't buy it if this were my only investment (high risk), but as higher yield fixed income and part of a wider portfolio I'm happy with the risk and it adds yield and diversification.

BTW: I will be looking to add to my fixed income even further once rates have risen, and that should be easier. That may be a couple of years off though. Also it will be interesting to see what the cash rates are, as a few years down the line I might settle for cash rates instead. Not easy to find good value at the moment though...

Cheers

Fletch

Edited August 16, 2014 by fletchsmile

[Sydneycraig]

thanks for the tips.

currently investing a lump sum across uk(15%)/European(15%) equity/tracker funds and wanted to add in some corporate bonds(15%).

looking at http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/f/fidelity-moneybuilder-income-class-y-income

perhaps I will jump in now and keep and eye on when to offload if rates do rise in the uk...

(55% still in cash until I decide where to go next)

Edited August 16, 2014 by Sydneycraig

[fletchsmile]

Yes, I'm familiar with the fund.

Actually last year I started managing some of my brother and sister-in-law's money for them as they weren't that impressed with their IFA. So I took a look at what they were doing with Skandia and their IFA and the charges they were paying, and got them to move it all to Hargreaves Lansdown, and said I'd look after it for them for free and should be able to do a better job - should add I'm not an IFA nor do I sell anything

They were recently looking to redeem some funds for their kids in university now and the fees. The Fidelity MoneyBuilder Income fund was one fund I've just sold as it didn't make the cut. I think there were better funds out there for their needs.

The charges are quite low at 0.3% which is favourable, and it's on HL's top 150 list + low fees. It also has a good track record from a good fund management house

The yield is OK - not fantastic really - a bit low at just under 4%. Nothing to write home about. It's mostly investment grade bonds hence the lower yield. Also about 10% gilts. What I was less enthusiastic was only around 10% is under 5 years, and large holdings above 10 years. As above when rates do move upwards it is lower yields and longer dated bonds that will be hit hardest. So I think going forward there are better funds out there. As mentioned I prefer higher yields and shorter date than this fund to cushion the coming rate rises.

Worth also noting I prefer (low cost) active managed to index trackers for bonds, as with the coming risks you've highlighted, the active manager should have the flexibility to adjust when things start to move and can use their judgement when to reposition. With an index tracker fund or index ETF you just have to accept what happens, and it's down to you when to sell and move on, rather than let the manager do it for you.

Other ones from the HL platform - if that's something you're interested in and have access to - I've held longer term you might want to consider are:

- Royal London Sterline Extra Yield (as above I just added to it)

- Kames High Yield Bond

Both of these are high yield funds meeting my yield criteria for higher yields less susceptible to rate rises

- Artemis Strategic Bond Monthly Income

- Jupiter Strategic Bond

Lower yields than above, but the "strategic" nature of these affords a high degree of flexibility to the active manager, in how they take positions, including shorting. They move quickly to protect downside

- Invesco perpetual Corp Bond

- Invesco Perpetual Monthly Income

These have been more long term general corporate bond holds. One of the key fund managers moved on not long back though. So I see them more of a hold than add, until I find something better. I still prefer them to the Fidelity Fund though

Personally I wouldn't be looking to jump in with your full 55% at this point in time. Perhaps drip feed some of it/ part of it in, and keep looking. As I say the fixed income sector isn't compelling at the moment. Probably won't be for a while yet. So that's why I'd go for add some, not all.

As mentioned if you were interested in the Fidelty Fund and HL platform see if the ones above make more sense for you or not

Cheers

Fletch

Edited August 16, 2014 by fletchsmile

[fletchsmile]

BTW Forgot to add. While I wouldn't jump in with the 55%, adding saying 10% in bonds makes sense even given the risks - to diversify. Also consider say 5% - 10% in emerging markets/ frontier market equity funds. Many were beat up last year compares to US and UK that had good runs, and in my view offer better long term prospects on more attractive current valuations. That would give you UK + EU + EM equities + fixed income a reasonable start, with still a decent proportion of powder dry/cash pending better opportunities

Cheers

Fletch

[Sydneycraig]

Thanks fletch. Much appreciated (and easy to follow) advise plenty to keep me going ... So much still to learn !

[Sydneycraig]

Also my trackers are for uk and euro equities. I have managed and tracker for these, and yes all are on hl platform ...

[Sydneycraig]

_{been looking at a few funds...}

_{the Jupiter vs the fidelity in particular}

_{http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/jupiter-strategic-bond-class-i-accumulation}

_vs

_{http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/f/fidelity-moneybuilder-income-class-y-income}

_{whilst, as you say the distribution yield is lower on fidelity at 3.95% vs 6%, the net annual returns are a tad higher with fidelity @ 7.6% vs 7.39%}

_{so, the return on the fidelity is coming rom unit price rise rather than from a higher distribution yield. is a higher distribution yield associated with higher risk? if so the fidelity is a better choice in terms of risk/return?}

_{or is it the case that the fidelity now have increased risk associated with the potential future rate rises that it hasn't in the past low rate years?}

[fletchsmile]

Craig,

You need to be careful now with HL's chart and performance stats. The new "unbundled" funds have thrown out some of the staistics and yields, so they aren't fully accurate, and the unbundled funds don't go as far back in performance. Essentially the unbundled and inclusive versions should in theory have the same performance as they are the same fund, but the changes have shortened the historical perf data and messed up some of the yields. So better to look at the old versions. I raised this with HL as I had two identical funds one unbundled and one inclusive and the yields are different. HL acknowledged this but say data comes from the fund managers.

So to compare the longer term performance it's better to look at the "inclusive" / old versions. Yields are 5.2% vs 3.95%.

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/j/jupiter-strategic-bond-accumulation-inclusive

vs

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/f/fidelity-moneybuilder-income-class-y-accumulation

You can then see that over 5 years, Jupiter returned +62.86% vs 40.56% for Fidelity. 3 yrs: 28% v19%. As you've noticed Fidelity was marginally better over 1 year though.

For discrete years to 15/8/XX, Jupiter beat the Fidelity Fund in 4 out of the last 5 years. The only one it didn't is the marginal diff in the last year, which your search picked up. Both are acc versions to show total return.

As they say though past perf and all that. But Jupiter has historically been better.

BTW In addition to Jupiter's superior historical performance, when looking forward I think it's better placed for when interest rates pick up (shorter duration and YTM) plus more flexibility

Cheers

Fletch

[Sydneycraig]

cheers for the info. makes sense.

will keep researching but I now have Jupiter as my key pick!

just need to figure out how much and when!

[paddyjenkins]

Interest Rates:

UK interest rates can't go much lower, which means potential for bond price increases is limited. There's a good chance interest rates will rise in 2015, particularly if and when the US FED starts raising interest rates. When that happens bonds will fall. I'd expect rate rises to be gradual.

Nothing is guaranteed though, and if the economies suffer set backs don't be surprised for US and UK etc to keep rates lower for longer, and perhaps even revert to further QE. So the timing of rate rises is not guaranteed. Eventually it will happen though.

Buying Corp Bonds:

That means you're essentially looking at the higher yield on corporate bonds vs cash shorter term, i.e making money short term but longer term risking capital losses. Given rises should be gradual that would give time to reposition yourself.

Aside from interest rates you have the questions of where else would you put your money if not bonds. Cash looks poor value short term. Also for a diversified portfolio you want to hold some bonds. There are also other factors such as your risk tolerance, time frame, objectives (eg are you seeking income), currencies, default rates and expectations etc. Put all these together and different people's answers will vary

My approach and a few examples:

Historically I've always favoured equities. As I get older though I've been adding to fixed income holdings. I would like to add more, but have been doing so slower than I would ideally like because of the risks you highlight. I have been adding to fixed income holdings selectively when opportunities come up, even though slower than I'd like.

My preference for adding is shorter/medium term dated bonds (preferably under 5 years), with higher yields. These will be less impacted when rates do start rising than longer dated and lower yields. I see no attraction in gilts hence corporate bonds as you mention. Also I'm at least getting paid reasonably (compared to cash) well pending when rates do rise. I'm not particularly worried on default rates.

Holdings I've added in the last year or so:

- Co-operative Bank bonds - added in mid 2013 - these were speculative and I bought after the price dropped significantly last year on default risk. They were yielding 15%. They have been restructured though. After restructuring they are now on the parent company and pay an 11% coupon on a price of about 120, for an effective 9% yield until 2025. I also have a small capital gain. That was an example of a speculative opportunity, and also longer date than I was normally looking at, but at those high yields I thought worth it. Still are in my view locking in 9% for 10 years I'm OK to hold.

- Royal London Sterling Extra Yield fund - added this month - to increase bond holdings - the fund has no initial charge if bought thru someone like Hargreaves Lansdown, and an annual charge of just over 0.3%, with yield of over 6%. Also on their top150 list. About 60% UK is in corp bonds and the rest international bonds etc. Around 40% is under 5yr, and a further 30% under 10. Most is non-investment grade or non-rates. It's a well managed fund, with a reasonably flexible mandate and good performance history both for discrete and cumulative periods.

- AHYGS - iShares Asian High Yield Bond Index ETF - added recently when the yield was around 7%. Carries a 0.5% fee. Now a bit lower:

http://www.bloomberg.com/quote/AHYGS:SP

Obviously not UK. Asia focused, with 40%+ in China. I bought the SGD version. Given I live in Thailand I expect the currencies to better correlate with THB than GBP. But for someone in the UK their currency attitude may differ. The bonds are high yield so almost non are investment grade. But at this stage I'm not worried about default risk. I bought for the yield as part of a wider investment portfolio to get some more fixed interest exposure. I wouldn't buy it if this were my only investment (high risk), but as higher yield fixed income and part of a wider portfolio I'm happy with the risk and it adds yield and diversification.

BTW: I will be looking to add to my fixed income even further once rates have risen, and that should be easier. That may be a couple of years off though. Also it will be interesting to see what the cash rates are, as a few years down the line I might settle for cash rates instead. Not easy to find good value at the moment though...

Cheers

Fletch

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage. I prefer longer maturities myself, depending on curve shape of course. But not funds, as then you have no maturity date. The trouble with buying individual bonds though is to diversify, otherwise it makes no sense to talk about low default dates, because that's a statistical thing. If you buy too many bonds you then pay more commissions and have to make more decisions. The other problem now is credit spreads are low, which makes me think sovereign bonds, obviously not European though, offer better risk to reward unless default rates stay so low, which is unlikely. It's all a balancing act. Edited August 19, 2014 by paddyjenkins

[Naam]

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage. I prefer longer maturities myself, depending on curve shape of course. But not funds, as then you have no maturity date. The trouble with buying individual bonds though is to diversify, otherwise it makes no sense to talk about low default dates, because that's a statistical thing. If you buy too many bonds you then pay more commissions and have to make more decisions. The other problem now is credit spreads are low, which makes me think sovereign bonds, obviously not European though, offer better risk to reward unless default rates stay so low, which is unlikely. It's all a balancing act.

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage.

i haven't experienced this phenomenon in more than 35 years of bond investing and bond trading

[paddyjenkins]

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage. I prefer longer maturities myself, depending on curve shape of course. But not funds, as then you have no maturity date. The trouble with buying individual bonds though is to diversify, otherwise it makes no sense to talk about low default dates, because that's a statistical thing. If you buy too many bonds you then pay more commissions and have to make more decisions. The other problem now is credit spreads are low, which makes me think sovereign bonds, obviously not European though, offer better risk to reward unless default rates stay so low, which is unlikely. It's all a balancing act.

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage.

i haven't experienced this phenomenon in more than 35 years of bond investing and bond trading

Then I suppose you've learned zero in your 35 years because curve flattening happens ahead of and during most hiking cycles...in fact find me one where it hasn't happened.

Anyone noticed what's been happening to the US curve in the past 12 months as talk has turned to hiking? Anyone notice what happened in the last hiking cycle? Or the one before that? Or the one before that?

Naam, you may be able to fool many of these forum posters but you don't fool me...you are a fake.

Edited August 19, 2014 by paddyjenkins

[fletchsmile]

Shape of yield curve(s), credit spreads, interest rates, currencies, single bonds vs funds for diversification, actively managing being nimble etc etc are all factors to bear in mind and juggle. No perfect fixed income/ bonds out there though at the moment. Looking forward to a scenario in a few years time where cash rates pick up though

[Naam]

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage. I prefer longer maturities myself, depending on curve shape of course. But not funds, as then you have no maturity date. The trouble with buying individual bonds though is to diversify, otherwise it makes no sense to talk about low default dates, because that's a statistical thing. If you buy too many bonds you then pay more commissions and have to make more decisions. The other problem now is credit spreads are low, which makes me think sovereign bonds, obviously not European though, offer better risk to reward unless default rates stay so low, which is unlikely. It's all a balancing act.

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage.

i haven't experienced this phenomenon in more than 35 years of bond investing and bond trading

Then I suppose you've learned zero in your 35 years because curve flattening happens ahead of and during most hiking cycles...in fact find me one where it hasn't happened.

Anyone noticed what's been happening to the US curve in the past 12 months as talk has turned to hiking? Anyone notice what happened in the last hiking cycle? Or the one before that? Or the one before that?

Naam, you may be able to fool many of these forum posters but you don't fool me...you are a fake.

you are documenting your utmost ignorance by pointing to UST in a thread named "corporate bonds" without considering the prevailing special situation of sovereign debt.

that is reason enough for me to refrain from discussing the brushstroke and the colours of an old master's painting with a blind man.

signed:

Naam Fake

[Naam]

Shape of yield curve(s), credit spreads, interest rates, currencies, single bonds vs funds for diversification, actively managing being nimble etc etc are all factors to bear in mind and juggle. No perfect fixed income/ bonds out there though at the moment. Looking forward to a scenario in a few years time where cash rates pick up though

No perfect fixed income/ bonds out there though at the moment.

that's a matter of perspective and individual perception Fletch. personally i don't consider my present investments which (a heap of cash @ 0% excluded) yield a hair above 10% p.a. as "perfect".

but adding the additional YTD capital gains of ~9.5% generate a "fake", albeit relaxing, smile on my face

[paddyjenkins]

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage. I prefer longer maturities myself, depending on curve shape of course. But not funds, as then you have no maturity date. The trouble with buying individual bonds though is to diversify, otherwise it makes no sense to talk about low default dates, because that's a statistical thing. If you buy too many bonds you then pay more commissions and have to make more decisions. The other problem now is credit spreads are low, which makes me think sovereign bonds, obviously not European though, offer better risk to reward unless default rates stay so low, which is unlikely. It's all a balancing act.

I'd be carful of assuming shorter maturity is safer in the run up to or during a policy hiking cycle. Curves tend to flatten in a hiking cycle so, per unit of risk, the shorter maturities suffer more damage.

i haven't experienced this phenomenon in more than 35 years of bond investing and bond trading

Then I suppose you've learned zero in your 35 years because curve flattening happens ahead of and during most hiking cycles...in fact find me one where it hasn't happened.

Anyone noticed what's been happening to the US curve in the past 12 months as talk has turned to hiking? Anyone notice what happened in the last hiking cycle? Or the one before that? Or the one before that?

Naam, you may be able to fool many of these forum posters but you don't fool me...you are a fake.

you are documenting your utmost ignorance by pointing to UST in a thread named "corporate bonds" without considering the prevailing special situation of sovereign debt.

that is reason enough for me to refrain from discussing the brushstroke and the colours of an old master's painting with a blind man.

signed:

Naam Fake

L-dog.jpg

Naam.

We were discussing bonds, corporates amongst them. Using US treasury bonds is a pretty good example to use in a discussion of bonds, it's the biggest market in the world, and the point highlighted your ignorance of basic bond market mechanics. You claimed you hadn't seem the phenomenon of hiking cycle flattening in 35 years of trading bonds and the example I used highlighted your stunning ignorance using the most known market in existence. If you haven't seen the most glaring and undeniable behavior of that huge market, and by the way it's typical not atypical, then who is the blind one Mr Namm? As for discussion with you, I really doubt you have anything to add apart from your usual ability to irritate people.

Edited August 20, 2014 by paddyjenkins

[fletchsmile]

Craig,

The following article today from HL's website may be of interest, re Kames High Yield Bond Fund

http://www.hl.co.uk/funds/fund-news-and-investment-ideas/fund-news--and--alerts/kames-high-yield-bond-fund-removal-from-wealth-150?utm_source=Silverpop&utm_medium=email&utm_campaign=E0FRN_Kames%20High%20Yield%20Bond%20Fund_removed%20from%20W150%20(1)&utm_content=Read%20our%20latest%20comment_1&theSource=E0FRN&Override=1&sp_mid=46768914&sp_rid=ZmxldGNodGhhaTY4QHlhaG9vLmNvbQS2

Cheers

Fletch

[Sydneycraig]

Thanks fletch ... Interesting to see that the higher risk bonds return only marginal extra returns. Not bought into anything yet. Still learning/pondering

[fletchsmile]

Thanks fletch ... Interesting to see that the higher risk bonds return only marginal extra returns. Not bought into anything yet. Still learning/pondering

Yes I found it interesting particularly as I hold the fund, and it has done well for me over the years. I would hold for now though, but if adding would pick others like Jupiter strategic or Royal London (low charges) - which as I said I added to recently.

On the 2 key issues raised:

1) Charges - yes they are a bit higher than could but. Then again the article shows the consistent out performance that's generated in the past. I haven't minded paying a little extra for that consistent outperformance/ benchmarking/average beating

2) Spreads on high yield bonds/ risk premium. Yes while they have narrowed and are historically low it's not something I'm worried about just yet. You have to look at why the spreads narrowed and what might cause them to widen and when. Default rates are one factor, as mentioned above I don't expect significant increases. Yield chasing - that's still there. High levels of liquidity and low rates, while liquidity is decreasing with decreasing QE there's still a dcent level at not many decent alternatives for yield. and so on. Yes I think it's a risk, but not an immediate one. I think Kames are a highly skilled fund management house, that will address that as and when needed.

BTW I mentioned spreads as being a factor above. In the same way paddy raised about yield curve flattening. Yes I think they are risks but not ones I'm overly worried about just yet. Meanwhile I'd prefer to collect that extra yield even if it is not as much extra as it used to be. I simply can't accept the yield on gilts in view of the risks, and many investment grades are too low yields for my targets.

BTW2 In terms of yield curves flattening, as Paddy raised, while I expect it to happen, and don't expect it just yet, the point paddy raised will also differ in impact across different curves, eg gilts, HYB and for other factors like spreads, so it won't be as simple in my view as shorter durations fairing worst. It will be a combination of factors pulling as ever in different directions. Where, when and how the curve flattens will impact any decision, and needs to be weighed vs longer term will be affected more by increases in rates than shorter term. Also I don't think the flattening will just happen shortly overnight, in the same way rate rises won't. There'll be time to adjust.

That assumption also overlooks that if you are in say <5year bonds and you're expecting the curve to flatten in 1 year+ then some will already have matured, so you naturally allow yourself time to reposition. In addition some of the duration of all longer term holdings will decrease, some will start becoming shorter term under 5 years. i.e the portfolio is not static, so timing is important, and for me while I think curves in general will flatten, the timing is some time off yet, plus I prefer collecting the extra yields on high yield bonds which already start with high rates so flattening will hopefully have less of an impact.

Knowing Naam and his approach and style to investing in bonds, and from time to time the portfolio he passes on, I can see why he doesn't bother with it as well, and it's not really on his radar. He proves to be very successful, but often a case of don't try this at home....

Not to say either are wrong, just their perspectives, objectives and styles differ and depending on what you hold different factors are more relevant. Hence all the juggling

Cheers

Fletch

Edited August 21, 2014 by fletchsmile

[fletchsmile]

Coming back to choice of funds, juggling all these variables is another reason I like the Jupiter Strategic Fund. They have a good track record and a strong team. Being strategic in nature rather than committed to any one field, they can do the juggling for you. Kames for example is more tied to high yield, although you can see in their holdings they are dealing with that.

No need to limit yourself to one fund either, and I wouldn't choose just one fund. There are advantages to also spreading your types of bond funds, in case one has a bad year or you/they get it wrong. Plus being in several means you already have an interest in alternatives, and if suddenly you need to move you don't need to start from scratch. At the moment I think Jupiter Strategic is a key core fund, and will hold and later reduce high yield like Kames, but I doubt I'll probably sell completely just change weightings.

Worth also mentioning: On Jupiter Strategic you'll notice that their holdings also match my own views and my own objectives. A lot of bonds rated BBB down to B (=higher yields) and the majority are under 5 years. Artermis Strategic is similar: high weighting in < 5years and BBBs to B. Both have good track records.

Cheers

Fletch

[paddyjenkins]

Thanks fletch ... Interesting to see that the higher risk bonds return only marginal extra returns. Not bought into anything yet. Still learning/pondering

Yes I found it interesting particularly as I hold the fund, and it has done well for me over the years. I would hold for now though, but if adding would pick others like Jupiter strategic or Royal London (low charges) - which as I said I added to recently.

On the 2 key issues raised:

1) Charges - yes they are a bit higher than could but. Then again the article shows the consistent out performance that's generated in the past. I haven't minded paying a little extra for that consistent outperformance/ benchmarking/average beating

2) Spreads on high yield bonds/ risk premium. Yes while they have narrowed and are historically low it's not something I'm worried about just yet. You have to look at why the spreads narrowed and what might cause them to widen and when. Default rates are one factor, as mentioned above I don't expect significant increases. Yield chasing - that's still there. High levels of liquidity and low rates, while liquidity is decreasing with decreasing QE there's still a dcent level at not many decent alternatives for yield. and so on. Yes I think it's a risk, but not an immediate one. I think Kames are a highly skilled fund management house, that will address that as and when needed.

BTW I mentioned spreads as being a factor above. In the same way paddy raised about yield curve flattening. Yes I think they are risks but not ones I'm overly worried about just yet. Meanwhile I'd prefer to collect that extra yield even if it is not as much extra as it used to be. I simply can't accept the yield on gilts in view of the risks, and many investment grades are too low yields for my targets.

BTW2 In terms of yield curves flattening, as Paddy raised, while I expect it to happen, and don't expect it just yet, the point paddy raised will also differ in impact across different curves, eg gilts, HYB and for other factors like spreads, so it won't be as simple in my view as shorter durations fairing worst. It will be a combination of factors pulling as ever in different directions. Where, when and how the curve flattens will impact any decision, and needs to be weighed vs longer term will be affected more by increases in rates than shorter term. Also I don't think the flattening will just happen shortly overnight, in the same way rate rises won't. There'll be time to adjust.

That assumption also overlooks that if you are in say <5year bonds and you're expecting the curve to flatten in 1 year+ then some will already have matured, so you naturally allow yourself time to reposition. In addition some of the duration of all longer term holdings will decrease, some will start becoming shorter term under 5 years. i.e the portfolio is not static, so timing is important, and for me while I think curves in general will flatten, the timing is some time off yet, plus I prefer collecting the extra yields on high yield bonds which already start with high rates so flattening will hopefully have less of an impact.

Knowing Naam and his approach and style to investing in bonds, and from time to time the portfolio he passes on, I can see why he doesn't bother with it as well, and it's not really on his radar. He proves to be very successful, but often a case of don't try this at home....

Not to say either are wrong, just their perspectives, objectives and styles differ and depending on what you hold different factors are more relevant. Hence all the juggling

Cheers

Fletch

All good stuff Fletch.

I made two points, one on curve shape and one on credit spreads. Believe me, both matter if you really care about the risks you are taking and the rewards you can achieve. The trouble with sticking to the front is very low yields, which drives you into the more dangerous corners of the credit universe in order to find slightly higher yields. Curve flattening has helped me hugely over the past 9 months, my long dated bonds have done very well and I've stayed away from short maturities like the 5 year. Would I buy now, no, I actually sold some today in fact. But I hope to get a chance to buy back.

On credit spreads, they will explode at some point but nobody knows when and certainly not the vast majority of retail fund managers. When the credit correction comes it may start suddenly, it won't be gentle, your fund manager is highly unlikely to catch it and be able to get out even if he wanted to. Just take a look at charts of credit sensitive instruments. They tend to gap down and with all the heavy positioning out there now, the risk of a sudden sell off is even more dangerous than it has been in the past.

I have quite a few bonds, including corporate. But I don't have my head in the sand about the risks.

By the way, bonds have rallied hugely in the past three decades but a turning point is coming. The rally is in it's dying stages. That doesn't mean we will see a crash, but the easy money is over. So it's been easy for long only bond fund managers to look like geniuses and individual bond buyers have been able to make money no matter how ignorant they've been of how these markets work...rising tides lift all boats. Anybody who claims to have traded bonds for 35 years but denied curve flattening has ever happened really must have a screw loose somewhere. That turning point is going to sort the wheat from the chaff. Believe me, there is a lot of chaff out there.

Good luck.

[paddyjenkins]

Thanks fletch ... Interesting to see that the higher risk bonds return only marginal extra returns. Not bought into anything yet. Still learning/pondering

Yes I found it interesting particularly as I hold the fund, and it has done well for me over the years. I would hold for now though, but if adding would pick others like Jupiter strategic or Royal London (low charges) - which as I said I added to recently.

On the 2 key issues raised:

1) Charges - yes they are a bit higher than could but. Then again the article shows the consistent out performance that's generated in the past. I haven't minded paying a little extra for that consistent outperformance/ benchmarking/average beating

2) Spreads on high yield bonds/ risk premium. Yes while they have narrowed and are historically low it's not something I'm worried about just yet. You have to look at why the spreads narrowed and what might cause them to widen and when. Default rates are one factor, as mentioned above I don't expect significant increases. Yield chasing - that's still there. High levels of liquidity and low rates, while liquidity is decreasing with decreasing QE there's still a dcent level at not many decent alternatives for yield. and so on. Yes I think it's a risk, but not an immediate one. I think Kames are a highly skilled fund management house, that will address that as and when needed.

BTW I mentioned spreads as being a factor above. In the same way paddy raised about yield curve flattening. Yes I think they are risks but not ones I'm overly worried about just yet. Meanwhile I'd prefer to collect that extra yield even if it is not as much extra as it used to be. I simply can't accept the yield on gilts in view of the risks, and many investment grades are too low yields for my targets.

BTW2 In terms of yield curves flattening, as Paddy raised, while I expect it to happen, and don't expect it just yet, the point paddy raised will also differ in impact across different curves, eg gilts, HYB and for other factors like spreads, so it won't be as simple in my view as shorter durations fairing worst. It will be a combination of factors pulling as ever in different directions. Where, when and how the curve flattens will impact any decision, and needs to be weighed vs longer term will be affected more by increases in rates than shorter term. Also I don't think the flattening will just happen shortly overnight, in the same way rate rises won't. There'll be time to adjust.

That assumption also overlooks that if you are in say <5year bonds and you're expecting the curve to flatten in 1 year+ then some will already have matured, so you naturally allow yourself time to reposition. In addition some of the duration of all longer term holdings will decrease, some will start becoming shorter term under 5 years. i.e the portfolio is not static, so timing is important, and for me while I think curves in general will flatten, the timing is some time off yet, plus I prefer collecting the extra yields on high yield bonds which already start with high rates so flattening will hopefully have less of an impact.

Knowing Naam and his approach and style to investing in bonds, and from time to time the portfolio he passes on, I can see why he doesn't bother with it as well, and it's not really on his radar. He proves to be very successful, but often a case of don't try this at home....

Not to say either are wrong, just their perspectives, objectives and styles differ and depending on what you hold different factors are more relevant. Hence all the juggling

Cheers

Fletch

All good stuff Fletch.

I made two points, one on curve shape and one on credit spreads. Believe me, both matter if you really care about the risks you are taking and the rewards you can achieve. The trouble with sticking to the front is very low yields, which drives you into the more dangerous corners of the credit universe in order to find slightly higher yields. Curve flattening has helped me hugely over the past 9 months, my long dated bonds have done very well and I've stayed away from short maturities like the 5 year. Would I buy now, no, I actually sold some today in fact. But I hope to get a chance to buy back.

On credit spreads, they will explode at some point but nobody knows when and certainly not the vast majority of retail fund managers. When the credit correction comes it may start suddenly, it won't be gentle, your fund manager is highly unlikely to catch it and be able to get out even if he wanted to. Just take a look at charts of credit sensitive instruments. They tend to gap down and with all the heavy positioning out there now, the risk of a sudden sell off is even more dangerous than it has been in the past.

I have quite a few bonds, including corporate. But I don't have my head in the sand about the risks.

By the way, bonds have rallied hugely in the past three decades but a turning point is coming. The rally is in it's dying stages. That doesn't mean we will see a crash, but the easy money is over. So it's been easy for long only bond fund managers to look like geniuses and individual bond buyers have been able to make money no matter how ignorant they've been of how these markets work...rising tides lift all boats. Anybody who claims to have traded bonds for 35 years but denied curve flattening has ever happened really must have a screw loose somewhere. That turning point is going to sort the wheat from the chaff. Believe me, there is a lot of chaff out there.

Good luck.

[paddyjenkins]

Thanks fletch ... Interesting to see that the higher risk bonds return only marginal extra returns. Not bought into anything yet. Still learning/pondering

Yes I found it interesting particularly as I hold the fund, and it has done well for me over the years. I would hold for now though, but if adding would pick others like Jupiter strategic or Royal London (low charges) - which as I said I added to recently.

On the 2 key issues raised:

1) Charges - yes they are a bit higher than could but. Then again the article shows the consistent out performance that's generated in the past. I haven't minded paying a little extra for that consistent outperformance/ benchmarking/average beating

2) Spreads on high yield bonds/ risk premium. Yes while they have narrowed and are historically low it's not something I'm worried about just yet. You have to look at why the spreads narrowed and what might cause them to widen and when. Default rates are one factor, as mentioned above I don't expect significant increases. Yield chasing - that's still there. High levels of liquidity and low rates, while liquidity is decreasing with decreasing QE there's still a dcent level at not many decent alternatives for yield. and so on. Yes I think it's a risk, but not an immediate one. I think Kames are a highly skilled fund management house, that will address that as and when needed.

BTW I mentioned spreads as being a factor above. In the same way paddy raised about yield curve flattening. Yes I think they are risks but not ones I'm overly worried about just yet. Meanwhile I'd prefer to collect that extra yield even if it is not as much extra as it used to be. I simply can't accept the yield on gilts in view of the risks, and many investment grades are too low yields for my targets.

BTW2 In terms of yield curves flattening, as Paddy raised, while I expect it to happen, and don't expect it just yet, the point paddy raised will also differ in impact across different curves, eg gilts, HYB and for other factors like spreads, so it won't be as simple in my view as shorter durations fairing worst. It will be a combination of factors pulling as ever in different directions. Where, when and how the curve flattens will impact any decision, and needs to be weighed vs longer term will be affected more by increases in rates than shorter term. Also I don't think the flattening will just happen shortly overnight, in the same way rate rises won't. There'll be time to adjust.

That assumption also overlooks that if you are in say <5year bonds and you're expecting the curve to flatten in 1 year+ then some will already have matured, so you naturally allow yourself time to reposition. In addition some of the duration of all longer term holdings will decrease, some will start becoming shorter term under 5 years. i.e the portfolio is not static, so timing is important, and for me while I think curves in general will flatten, the timing is some time off yet, plus I prefer collecting the extra yields on high yield bonds which already start with high rates so flattening will hopefully have less of an impact.

Knowing Naam and his approach and style to investing in bonds, and from time to time the portfolio he passes on, I can see why he doesn't bother with it as well, and it's not really on his radar. He proves to be very successful, but often a case of don't try this at home....

Not to say either are wrong, just their perspectives, objectives and styles differ and depending on what you hold different factors are more relevant. Hence all the juggling

Cheers

Fletch

All good stuff Fletch.

I made two points, one on curve shape and one on credit spreads. I guarantee both matter if you really care about the risks you are taking and the rewards you can achieve. The trouble with sticking to the front is very low yields, which drives you into the more dangerous corners of the credit universe in order to find slightly higher yields. Curve flattening has helped me hugely since buying about 9 months ago after the sell off, my long dated bonds have done very well and I've stayed away from short maturities like the 5 year. Would I buy now, no, I actually sold some today in fact. But I hope to get a chance to buy back.

On credit spreads, they will explode at some point but nobody knows when and certainly not the vast majority of retail fund managers. When the credit correction comes it may start suddenly, it won't be gentle, your fund manager is highly unlikely to catch it and be able to get out even if he wanted to. Just take a look at charts of credit sensitive instruments. They tend to gap down and with all the heavy positioning out there now, the risk of a sudden sell off is even more dangerous than it has been in the past.

I have quite a few bonds, including corporate. But I don't have my head in the sand about the risks.

By the way, bonds have rallied hugely in the past three decades but a turning point is coming. The rally is in it's dying stages. That doesn't mean we will see a crash, but the easy money is over. So it's been easy for long only bond fund managers to look like geniuses and individual bond buyers have been able to make money no matter how ignorant they've been of how these markets work...rising tides lift all boats. Anybody who claims to have traded bonds for 35 years but denied curve flattening has ever happened really must have a screw loose somewhere. That turning point is going to sort the wheat from the chaff. Believe me, there is a lot of chaff out there.

Good luck

Edited August 21, 2014 by paddyjenkins

[Naam]

first it was

the shorter maturities suffer more damage

now it is

curve flattening

yawn...

what next?

signed:

"fake"

[paddyjenkins]

first it was

the shorter maturities suffer more damage

now it is

curve flattening

yawn...

what next?

signed:

"fake"

Wow, you really are clueless...curve flattening by definition damages the shorter maturities most....it's tautologically true, as they say...you are the chaff....bond market rally over and now the wheat is getting sorted from the chaff....good luck mr chaff

Edited August 22, 2014 by paddyjenkins

[Naam]

note to myself:

use quiet weekend to count chaff and ignore bigmouthed poor boys.

[fletchsmile]

Paddy / Naam

Why not share some of the investments you hold and why, or some that you think might be of interest to OP?

The theory is all well and good but as we all know there are a lot of factors at play so theoretically debating with only part of the picture doesnt go far.

Like I say I ve seen some of Naam s plays and from time to time we discuss objectives and strategies plus have seen years of his posts on here. So I can see where he is coming from and why he is not so bothered at the risks Paddy mentions.

From my side I ve posted some specific investments as well as theory. As I say I dont disagree with some of your points just the risks you flag are nt the one s I am prioritising.

Happy to share my views and investments and to be challenged and hear additional concerns so I welcome the different view points. Part of posting on here is getting other peoples input as everyone has parts of tgeir investing that can be improved.

Cheers

Fletch:)

Edited August 22, 2014 by fletchsmile

[Naam]

Paddy / Naam

Why not share some of the investments you hold and why, or some that you think might be of interest to OP?

The theory is all well and good but as we all know there are a lot of factors at play so theoretically debating with only part of the picture doesnt go far.

Like I say I ve seen some of Naam s plays and from time to time we discuss objectives and strategies plus have seen years of his posts on here. So I can see where he is coming from and why he is not so bothered at the risks Paddy mentions.

From my side I ve posted some specific investments as well as theory. As I say I dont disagree with some of your points just the risks you flag are nt the one s I am prioritising.

Happy to share my views and investments and to be challenged and hear additional concerns so I welcome the different view points. Part of posting on here is getting other peoples input as everyone has parts of tgeir investing that can be improved.

Cheers

Fletch:)

Fletch,

there's not much to share which could be of interest to the general Thaivisa public. you have seen my latest holdings and you are well aware that high yield / high risk bonds are per se and especially because of their minimum tradeable batches of $100 and $200k not suitable for the average "retail" investor.

the risk also applies to the subordinated T1s of debtors which are rated investment grade and even for much better rated debtors because of denominations in volatile currencies which are difficult to evaluate and even more difficult to hedge.