About four million employees are members of DC defined contribution pensions such schemes, and 86% of them are paying their money into so-called "default" funds. These tend to be partly invested in UK government bonds, in some cases heavily so if an individual is close to retirement.
In recent years the price of UK government bonds has had its very own bubble.
"There has been a big inflation of government bond prices, which may not be over, and it may be some considerable time until they deflate, but at some point they will have to come back down to earth," says Laith Khalaf, pension investment manager at fund supermarket Hargreaves Lansdown.
"Gilts are seen as a very safe asset, but actually at their current prices there is a potential for capital losses."
There are three related reasons bond prices have risen. Both here and abroad, governments have cut interest rates to try to stave off recession. This has had a knock-on effect on UK government bonds, known as gilts. As the Bank of England base rate has fallen to 0.5%, the fixed rate of interest paid by the gilts has become correspondingly more valuable and their prices have risen.
Gilts have also been seen as a "safe haven" by foreign investors who have been buying them during the turmoil in the finances of the Eurozone.
If you are trying to make sense of your pension our experienced Independent Financial Advisors at Enable would be able to talk you through your options.
Showing posts with label bond portfolio. Show all posts
Showing posts with label bond portfolio. Show all posts
Monday, 30 July 2012
Wednesday, 16 May 2012
Balancing your bonds...
Most wealth managing portfolios hold some bonds Enable's experienced IFA’s know that bond duration can be a useful indicator as to how the fund will perform, as the movement of bond yields is inversely correlated to the performance of the fund. This means that portfolio managers tend to hold different duration bonds in order to work out a weighted duration.
For example, in Chris Bowie’s Ignis Corporate Bond fund the duration is currently 7.6 per cent, slightly below the index of 7.8 per cent. This means the manager has less duration risk than the index. In short, this means is that for every 1 per cent that yields rise, the fund will lose 7.6 per cent, while for every 1 per cent that yields fall the fund will rise 7.6 per cent.
Last year Bowie stated he had duration greater than the benchmark, but says he had been shortening that position this year to now be slightly underweight the benchmark, adding that his fund is “getting ready to go quite a bit shorter.”
“Having duration risk will be one of the biggest risks over the next five years because yields are so low there is not much left to go for. I don’t think there is much left on the table.” At the moment 10-year UK gilt yields are trading around 2 per cent and have dipped as low as 1.9 per cent.
If you want to look at the distribution of your portfolio Enables experienced IFA’s are happy to talk it though with you.
For example, in Chris Bowie’s Ignis Corporate Bond fund the duration is currently 7.6 per cent, slightly below the index of 7.8 per cent. This means the manager has less duration risk than the index. In short, this means is that for every 1 per cent that yields rise, the fund will lose 7.6 per cent, while for every 1 per cent that yields fall the fund will rise 7.6 per cent.
Last year Bowie stated he had duration greater than the benchmark, but says he had been shortening that position this year to now be slightly underweight the benchmark, adding that his fund is “getting ready to go quite a bit shorter.”
“Having duration risk will be one of the biggest risks over the next five years because yields are so low there is not much left to go for. I don’t think there is much left on the table.” At the moment 10-year UK gilt yields are trading around 2 per cent and have dipped as low as 1.9 per cent.
If you want to look at the distribution of your portfolio Enables experienced IFA’s are happy to talk it though with you.
How to protect yourself against above target inflation
Many fund managers are taking short duration bonds to manage risk and enhance performance believing that yields have nowhere to go but up. So how does duration affect the risk and performance of a bond portfolio? Lets first define and quantify what is meant by duration and how it is applied.
Duration is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.
For the two most basic types of bonds the duration calculation varies: a zero-coupon bond has duration that is equal to its time to maturity; a bond that pays a coupon will always have a duration that is less than its time to maturity.
Thus on a zero-coupon bond the entire cash flow occurs at maturity, while a bond that pays coupons yearly and matures in, five or ten years will conversely repay the amount paid for the bond sooner.
Duration can also be used as a measurement of a bond portfolio’s sensitivity to interest rate movement in response to expectations that stronger economic activity will fan inflation, eroding returns on securities that pay fixed rates of interest. Enables IFA’s are always able to help you understand how to make the best of the bonds you hold in your portfolio.
Duration is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows. It is an important measure for investors to consider, as bonds with higher durations carry more risk and have higher price volatility than bonds with lower durations.
For the two most basic types of bonds the duration calculation varies: a zero-coupon bond has duration that is equal to its time to maturity; a bond that pays a coupon will always have a duration that is less than its time to maturity.
Thus on a zero-coupon bond the entire cash flow occurs at maturity, while a bond that pays coupons yearly and matures in, five or ten years will conversely repay the amount paid for the bond sooner.
Duration can also be used as a measurement of a bond portfolio’s sensitivity to interest rate movement in response to expectations that stronger economic activity will fan inflation, eroding returns on securities that pay fixed rates of interest. Enables IFA’s are always able to help you understand how to make the best of the bonds you hold in your portfolio.
Subscribe to:
Posts (Atom)