Midweek Musings (fixed income investing, part 5)

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!