Bond markets

[Condi]

Does anyone here invest in bond markets or hold bonds rather than stocks and shares? Ive never been a great stock picker, and dont have time to do it, and funds have always been a bit hit or miss. Bonds seem to offer a more stable return without the highs and lows, but still can return 5%+ a year, which tbh would do me nicely.

Anyone have any opinions or thoughts on them?

[Ginge R]

Have you looked at bond funds?

[sidicks]

Ginge R said:

Have you looked at bond funds?

Agreed - plenty of actively managed bond funds around!

[Fittster]

sidicks said:

Agreed - plenty of actively managed bond funds around!

actively managed = underperform the market while having high fees.

Why not have lower fees and better returns from a passive fund.

[sidicks]

Fittster said:

actively managed = underperform the market while having high fees.

Fittster said:

Why not have lower fees and better returns from a passive fund.

Because you won't necessarily achieve that!

As I've always said, with equities the bulk of the return should come from market exposure - beta. Alpha i.e. manager skill is just the icing on the cake, but won't normally materially change the overall outcome.

With bonds, manager skill can make a much bigger difference (when beta is expected to be much lower), hence it is worth paying for a specialist manager to try this alpha (and avoid the defaults which can materials impact returns).

[MisterJD]

You might find the cost entry higher in bond markets than it is for equities, and you may need to be investing £15k-£25k per instrument.

[sidicks]

MisterJD said:

You might find the cost entry higher in bond markets than it is for equities, and you may need to be investing £15k-£25k per instrument.

Exactly - hence the suggestion of a bond fund to ensure you obtain adequate diversification.

[ellroy]

Spot on Sid.

All bond funds are not equal. Buy a passive fund and have no control over the duration of the underlying, especially at present? You're having an absolute giraffe.

[Ginge R]

sidicks said:

Fittster said:

actively managed = underperform the market while having high fees.

Fittster said:

Why not have lower fees and better returns from a passive fund.

Because you won't necessarily achieve that!

As I've always said, with equities the bulk of the return should come from market exposure - beta. Alpha i.e. manager skill is just the icing on the cake, but won't normally materially change the overall outcome.

With bonds, manager skill can make a much bigger difference (when beta is expected to be much lower), hence it is worth paying for a specialist manager to try this alpha (and avoid the defaults which can materials impact returns).

Agreed. Bond funds are much more pragmatically costed too. Equities tend to be much more optimistic in terms of outlook. I'd agree with Sid, and go further.. a passive equity tracker is much more suited to the US than it is for some European markets. Passive Bond funds have their place and are valuable, but I'm always more inclined to suggest actives for Bonds and Fixed Income because insight, guile and experience count for so much more. Actives for defensive equity and income equity too, for that matter.

[ellroy]

As an addendum to the passive v active Bond fund debate something just reminded me that in 2015 in the US high yield sector one default, one, wiped out the index return. It was a casino by the way, not even the shale/energy sector that everyone was concerned about.

For me that explains why I'd not touch a passive bond fund whatever the cost saving.

[Fittster]

Ginge R said:

sidicks said:

Fittster said:

actively managed = underperform the market while having high fees.

Fittster said:

Why not have lower fees and better returns from a passive fund.

Because you won't necessarily achieve that!

As I've always said, with equities the bulk of the return should come from market exposure - beta. Alpha i.e. manager skill is just the icing on the cake, but won't normally materially change the overall outcome.

With bonds, manager skill can make a much bigger difference (when beta is expected to be much lower), hence it is worth paying for a specialist manager to try this alpha (and avoid the defaults which can materials impact returns).

Agreed. Bond funds are much more pragmatically costed too. Equities tend to be much more optimistic in terms of outlook. I'd agree with Sid, and go further.. a passive equity tracker is much more suited to the US than it is for some European markets. Passive Bond funds have their place and are valuable, but I'm always more inclined to suggest actives for Bonds and Fixed Income because insight, guile and experience count for so much more. Actives for defensive equity and income equity too, for that matter.

Lets see some evidence that guile and insight lead to higher return over the long term. As far as I can see the point of active management is to keep managers enjoying large fees.

In the equity market you get better performance with a passive fund or simply throwing a dart at the financial pages and the information I can find on active v passive bond funds doesn't show active managers in a good light.

https://www.trustnet.com/News/621979/the-passive-b...

https://www.thebalance.com/active-vs-passive-manag...

http://www.bloomberg.com/news/articles/2016-04-08/...

[Ginge R]

Generally, I'm a keen as anyone to use a good passive over an ersatz active. The case has been made and won many times. Where I do disagree is when the narrative suggests all actives are bad. They aren't. For a minority of clients is some defined situations, an active is priceless, and the benefit outweighs the cost.

Specifically, in that post, I referred to active bond traders vis à vis active equity managers. There are some appalling ones out there too, just read Liar's Poker or Bonfire of the Vanities!

Edit: This latest issuance has bond traders juices flowing. http://www.bloomberg.com/news/articles/2016-08-30/...

Edited by Ginge R on Tuesday 30th August 08:50

[Ozzie Osmond]

Emotionally, I hate the concept of tracking. It smacks of giving up! Nonetheless, tracking can be an efficient route for many private investors.

A few years ago I decided to track the Health a Pharmaceutical sector because I thought it might be a successful area with growing populations and increasing wealth. That has worked out very nicely, delivering excellent returns despite my complete lack of knowledge of the industry. This link shows the investment has more than doubled in four years, http://www.morningstar.co.uk/uk/funds/snapshot/sna...

The problem I would have with tracking bonds is that there will never be star performers and, in theory, there shouldn't be any dogs. Or to put it another way, there's not much difference between one bond and another bond in any particular category.

[sidicks]

Ozzie Osmond said:

Emotionally, I hate the concept of tracking. It smacks of giving up! Nonetheless, tracking can be an efficient route for many private investors.

A few years ago I decided to track the Health a Pharmaceutical sector because I thought it might be a successful area with growing populations and increasing wealth. That has worked out very nicely, delivering excellent returns despite my complete lack of knowledge of the industry. This link shows the investment has more than doubled in four years, http://www.morningstar.co.uk/uk/funds/snapshot/sna...

The problem I would have with tracking bonds is that there will never be star performers and, in theory, there shouldn't be any dogs. Or to put it another way, there's not much difference between one bond and another bond in any particular category.

There shouldn't be much difference in most investment grade bonds in most scenarios, so you are relying on your manager understanding the true risk and exposures of different rated bonds against each other.

However, avoiding the defaults is where the real value is added.

[kurt535]

bond markets brave place to start investing in atm with yields negative in many instances.

[Ozzie Osmond]

sidicks said:

However, avoiding the defaults is where the real value is added.

Yup. Always bothers me as an investment class that there's limited upside but unlimited downside - notwithstanding that the "risk" is considered to be lower than equities.

[sidicks]

Ozzie Osmond said:

Yup. Always bothers me as an investment class that there's limited upside but unlimited downside - notwithstanding that the "risk" is considered to be lower than equities.

1) strictly speaking there isn't unlimited downside, unlike sold call options!
2) investment grade defaults are low, typically <<1% p.a.
3) it's understanding the correlation of defaults (and downgrades) and managing those risks that is key.
4) the average default rate isn't necessarily the most relevant consideration!

[Ozzie Osmond]

sidicks said:

1) strictly speaking there isn't unlimited downside, unlike sold call options!

Good point. As I don't "gear", once I've lost 100% that's as bad as it's going to get! But I would never enjoy a total loss.

sidicks said:

2) investment grade defaults arehave historically beenlow, typically <<1% p.a.

"Past performance is no guarantee...." Everyone thought sovereign debt was a safe bet, until Greece etc.

sidicks said:

3) it's understanding the correlation of defaults (and downgrades) and managing those risks that is key.

Yes, that I understand and have no enthusiasm to undertake myself. Any bonds I hold are in funds.

sidicks said:

4) the average default rate isn't necessarily the most relevant consideration!

Understood. But a lot of people thought securitised US mortgages off balance sheet would be OK and that Leman Brothers were rock solid.

[Ginge R]

Ozzie Osmond said:

Emotionally, I hate the concept of tracking. It smacks of giving up! Nonetheless, tracking can be an efficient route for many private investors.

A few years ago I decided to track the Health a Pharmaceutical sector because I thought it might be a successful area with growing populations and increasing wealth. That has worked out very nicely, delivering excellent returns despite my complete lack of knowledge of the industry. This link shows the investment has more than doubled in four years, http://www.morningstar.co.uk/uk/funds/snapshot/sna...

The problem I would have with tracking bonds is that there will never be star performers and, in theory, there shouldn't be any dogs. Or to put it another way, there's not much difference between one bond and another bond in any particular category.

If you're referring to a vanilla passive tracker, maybe. But a synthetic ETN or ETF tracker which claims to double an index upside and halve the downside? Back away slowly.. not all trackers are created equally, some are sired of Frankenstein.

[DibblyDobbler]

I've recently put about 30% of my pot into actively managed corporate bond funds - from what I can see they have both made smallish positive gains almost every year for some time so seem like a sensible safe side to my portfolio (which is largely in high income equity funds).

But I read a disturbing piece today about a bond market 'rout' which seemingly is going to happen when interest rates eventually start to rise. How will this work though? Is it because of defaults on bonds? Or what might actually happen in this scenario?

Any advice would be appreciated!