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.

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.

How to make the most of your bonds?

Independent Financial Advisors like Enable acknowledge the fact that with continued equity market volatility many of the traditional ‘safe haven’ investment options like government bonds are offering historically low yields, so many investors are looking for alternatives.

Recent figures from the Investment Management Association for March however showed fixed income was the most popular asset class as a whole for the seventh month in a row with net retail sales of £660m. Also, the IMA Sterling Strategic Bond sector was the best selling of all IMA sectors for the month.

The sector, which contains funds that invest at least 80 per cent of their assets in sterling denominated fixed interest securities - or securities that are hedged back to Sterling - recorded net retail sales of £366m, the highest figure since April 2011, and significantly above the monthly average for the previous 12 months of £211m. Investor inflows into these funds mean it is the second largest fixed income sector at £25.6bn, second only to the £52.8bn Sterling Corporate Bond sector.

Andrew Sutherland, head of credit and aggregate at Standard Life Investments and manager of the £92.1m Standard Life Investments Strategic Bond fund, says most people think of bonds as having very few differences but he adds: “There’s a vast amount of difference in terms of risk and performance in bonds. You’ve got high yield which is very cyclical and high yielding, but you’ve also got your government bonds and things like index-linked and investment grade corporate bonds. So there’s quite a lot of variety and they all do different things at different times.”

Strategic bond management with Enable’s IFA’s could help you make the most of your wealth.