Its Not Harry

Comment and opinion for retail investors in the UK

Asset Allocation

Watching Brief – January 2023

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Pottering About

Happy New Year to all my readers!

As this month’s briefing takes quite a detailed look at the current state of the macro factors that you might want to assess when thinking about your asset mix, I have not included the ‘Hit or Myth’ element, although I did have a topic in mind which I mention later on.  I will reserve that for another post. It won’t be a long wait!

The cloudy crystal ball

I could this month make sensational or amusing prognostications about investment markets in 2023; I do see articles along those lines in the professional investors’ media almost every day at the moment! It is a seasonal diversion, I guess and most people know that the very name of the month January is about looking both back and into the future.

Thinking and speculating are not the same thing!

How often do pundits actually come up with useful predictions?

I worked out a long time ago that one can actually assess the value of such exercises by looking back at the confident prophecies of the so-called experts made exactly one year ago and see how well they did. The preservation of easy to access past publications on the internet has made that a simple task.

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Midweek musings – Santa Rally this year?

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After a healthy and sustained period of growth from mid October, global equity markets, as recorded by the MSCI World Index fell back a little in the last week, but the chart still has a solid looking recovery on the right hand side. I have suggested that the market has been poised to react to good news for some time and the slightly more dovish tone of central bankers, slowdown in consumption data and weaker employment numbers will all have been taken as leading indicators that the worst of the monetary tightening (ie rising interest rates and the end of QE) is behind us.

In the UK, the Hunt mini-budget brought the expected fiscal tightening (ie tax rises and spending cuts). That was all as expected and indeed, much had been leaked in advance to soften up expectations. UK markets were more fraught about the prognostications for the UK economy from the OBR, the Bank of England (which has certainly well and truly fallen out with the government) and global economic forecasters.

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Midweek Musings (fixed income investing, part 5)

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The remarkable political events of the last few days mean that the yields on UK Government debt (gilts) have been up and down like a fiddler’s elbow and that will have fed turmoil into fixed income markets in general. The iShares Core £ Corporate Bond share (a useful benchmark) is unsurprsingly down a scary amount year to date but has been up and down like a yo-yo since late September.

It remains my opinion that although there will be great opportunities to invest in fixed income assets for those who need something other than equities in their portfolios, and such opportunities have not existed for a long time, it would be a brave invesor who went into the market right at this moment.

Nonetheless, now is an ideal term to brush up our knowledge of the investment options.

I already covered the requirements of an investor wanting a slightly spicier alterenative to cash on deposit and now I want to address the requirements of investors who are looking for an asset class diversifier, or even a tactical play to make a ‘quick buck’.

Narrowing the options

A look at the list of investment sectors or peer groups published by the Investment Association will reveal a bewildering range of fixed income funds from UK Gilts to Global Emerging Market Bond (local currency). Someone with plenty of experience could mix and match funds from various peer groups and put together a package of funds with varying characteristics to diversify risk within the fixed income asset class.

Or you could choose a passive index tracker fund, like the Vanguard Lifestrategy series with a high bond component (which in fact true for most of the options) and you will get a fixed exposure to a variety of fixed income assets. For example the Lifestrategy 40 fund includes, among others, a large holding in global bonds, some UK governmant bonds (gilts) and also UK Index Linked Gilts. The Fixed Income style box from Morningstar records a high sensitivity to interest rate changes and medium credit quality. The fund has lost 15% so far this year (compare with a fund I review later) in Sterling terms, so hardly the lower risk option one might have thought from the traditional viewpoint or even the marketing material.

Picking bond funds for the novice is a nightmare, right? Potentially so, I suggest. But I can help!

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Midweek Musings – Bonds Q&A

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I am pausing my mini-series of posts on selecting bond funds for specific objectives to write about some high level issues, because what has been happening in the fixed income markets recently has been so remarkable that it is being described as a ‘first’ by specialist managers with over 30 years experience.

I will pose and answer some questions but would welcome others from readers with a view to publishing the answers in another post. Please use the comments option or email me if you prefer.

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Midweek musings (fixed income investing, part 4)

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This post is early because I am away for a few days birdwatching the mass migrations on the edge of the Baltic Sea for the rest of this week. My monthly briefing will conversely be late, but given the political events in the UK, waiting a few days to see what further fallout there is from the special fiscal operation may be wise anyway.

In the post called ‘Getting your Fix, part two’, I proposed 3 possible motives for considering fixed income investments now the market has inflected and all the factors I outlined in part one, plus the recent Chancellor’s proposals in the UK, are in play. This week, I want to see how you would approach research into the market if your objective was the first one I suggested: earning a return on money that would otherwise be in cash.

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Midweek Musings – Spoilt for Choice (fixed income basics, part 3)

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I started this series of educational posts by outlining current factors that make fixed income assets a very different proposition to what they were a year or so ago. Since I did that, some factors have been amplified.

The UK markets had been waiting to see what a new leader would do to help people with energy bills and was nervous about the likely impact on the public finances but almost everyone was astonished (even those who approve of the return to Reagonomics) by the special fiscal operation (or Watership Down as some have called it) announced at the end of last week. The impact on fixed income markets has been instant and dramatic with yields rising to levels not since before 2008.

Since I started writing this, the Bank of England has announced that it is reversing its plan to start quantative tightening and going back to money printing. I assume this means that that want to clamp down on inflation by printing money – a novel new economic theory, not exactly as imagined by Milton Friedman and associates!

A decline in the value of Sterling may still turn into a currency crisis and such crises tend to run out of control until they hit the buffers. All this is happening as I write so I have no intention of offering guidance on what to buy and when, or even to say if the fixed income asset class is yet attractively priced (it certainly will be before too long, I guess).

What this week’s post will do is explain how the fixed income market is divided up for access by retail investors. This information can then be matched up with your objective to see what funds universe might meet your needs.

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