Weekend reading: A plethora of potential good reads

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• 1 dearieme June 4, 2016, 3:13 pm

  Fund fees: this is why I’ve always been suspicious of “Unit Trusts”, as I still think of them. But shouldn’t it be rather easier to calculate the cost of investing through Investment Trusts?
• 2 dearieme June 4, 2016, 3:25 pm

  “Buying a home is 20% more expensive than renting”: heretic!!
• 3 Learner June 4, 2016, 3:31 pm

  Glad FT used the word “Buying” rather than “Owning” in the article title given the study is comparing costs in the first year only. The gradient on that Rent line is relentless.

  Timing is just right for my (Denver time) Saturday morning, TI 🙂
• 4 Sara June 4, 2016, 4:09 pm

  Does anyone have an opinion on the government’s consultation on British Steel Pension scheme changes? Is it the crack in the wall of letting all companies abandon their schemes when convenient?

  I have 11 years deferred in BS and our options seem to be between bad and terrible. So I am really pissed off with this. BS for bullshit if you ask me.

  I don’t remember being told it could all go tits up when I signed up!
  I know I should be grateful the rescue scheme exists at all but it doesn’t feel that way at the moment.
• 5 Mathmo June 4, 2016, 4:10 pm

  And there I was thinking TI sat hermit-like at home developing monk-like divining powers to feel his active alpha. Another benefit of the passive approach: you can wield the Chateauneuf-du-Pape on a Thursday night and feel no ill-effects*.

  And one of the things that I had to do in my fug was go to a rented out flat and look at a washing machine and a weird leak from upstairs, and a communal gutter that was broken. I nearly never have to check in with the CEO of BP to see if there’s a drying problem in my VUKE or a drip in my VUSA. But I rather like my tenant and I really like the rent he pays so that’s all part and parcel of being an evil BTL landlord isn’t it? Splittable’s piece this week focuses nicely on the right stuff: rents are high rather than the usual “landlords are evil” line. Ownership of an essential asset has nothing to do with being able to use that asset. After all — I find clean water essential, but I have no desire to own a sewage works. Asset prices are high because we live in a low yield world and rents are high. Duh. We need to stop focusing on BTL and house prices and start worrying about supply and demand at the rental level. I find the drive to lower quality an alarming trend in that regard — once as a watch leader on a yacht, I hot-bunked with the other watch leader (since one of the two is always on deck) — I can tell you it brings out a whole new level of OCD tidiness and practical agreements on what goes where. Co-habiting as a couple is a doddle compared with that.

  Of course the young renters expect the world (and part of the world’s great lesson for them will be that they can’t just have it by wanting it) but even I’m slightly startled by the headline rental figures I see being paid by young people. But I suppose there’s the cost of a walk to work in one of the most desirable cities in the world. The train from Maidenhead is cheaper. The technological alternative to being in London is cheaper still. Is there something corrosive about this? Do we need to worry about this change, or is this just the incentive structure that this generation need to hone their improvements as the energy crisis was for the one before and the internet was for us? Just because we can see the difference and journalists can write about it (and someone doesn’t like it) doesn’t mean it’s necessarily bad and that *something must be done*.

  * portfolio unblemished. I was decidedly in “correction” territory.
• 6 The Investor June 4, 2016, 6:12 pm

  @Sara — I really don’t know, but I can see why you’re concerned. The mooted changes as I understand them refer to the proposed changed from RPI to CPI that I mentioned in my Index-linkers post. This would reduce the likely future payouts, but I don’t think it constitutes abandonment. That said I obviously can see it would be painful; I’m not justifying the changes either way. What seems really odd to me is that the rules/terms can just be changed on the fly like this, but then that’s one of the things I didn’t like personally about the old defined benefit schemes. (In fact, the restrictions and arcanity of such schemes, as seen through a family relation, was one of the motivations for starting this blog way back in the day: http://monevator.com/how-one-relatives-pension-plight-taught-me-to-save-the-hard-way/). Good luck, hope it works out for you!

  @Learner — Hah! Well another reason why I was late today was I was Skyping a US friend on the East Coast who wakes up at 6am EST to get an hour done before his children rise… 😉

  @Mathmo — I’m afraid and ashamed to admit you were much closer with your original estimates. My use of the words Tuesday and Partying so closely together was intended to imply a bit of sarcasm. 😉 I am venturing out from the cloisters more and more nowadays, though. Maybe my returns are suffering with this reckless hedonism!
• 7 Steve R June 4, 2016, 7:54 pm

  I completely do not understand the “What is the worst case scenario for bonds?” article. Note that I’m not saying it’s crap and bonds are stupid, I’m saying I completely do not understand it.

  Can someone please explain how these “constant maturity yield” bonds work and how those numbers in the article are calculated? I’m only really familiar with UK gilts which, as I understand it, simply pay a fixed percentage of the nominal value each year, whereas these bonds appear to have a variable payout (“2% *in year one*”, my emphasis). Is that what makes the magic in this example work?

  Cheers!
• 8 Steve R June 4, 2016, 8:07 pm

  Apologies if that last comment started a little rough, I was perhaps over-compensating lest anyone think I was trying make snide “bonds are overvalued, why would you hold them?” comments”. I’m genuinely curious about this, I do hold some bonds even though I don’t feel very comfortable with them and I’d like to understand this, since I think it might make me feel better about my holdings!
• 9 dearieme June 4, 2016, 9:21 pm

  “refer to the proposed changed from RPI to CPI”: they are also considering removing the inflation protection altogether for any years of pensionable service before 1997 (which is what the PPF does).

  They won’t do it; it’s all a pre-referendum stunt, perhaps by both HMG and Tata.
• 10 SurreyBoy June 4, 2016, 9:29 pm

  Steve R, my understanding is that constant maturity yield bond funds are basically bond funds where each month some bonds mature and the proceeds are reinvested at current interest rates.

  So the guy is basically saying that if interest rates rise, the price of the bond fund will fall, but because the bonds are constantly maturing the fund will reinvest in new bonds and so reap the now higher interest payable. Provided the bond funds are mostly short dated (ie < 10 yrs mostly) then provided you hold the investment, you should still see positive returns. Thats what his chart tries to explain. Vanguard had a really simple explanation of this but i couldnt find the link.

  If he was on twitter hed say: interest rates will rise, bond fund prices will fall, but provided they are short maturity bonds then gradual reinvestment in new bonds will make the returns positive.
• 11 Steve R June 4, 2016, 9:50 pm

  @SurreyBoy Thanks, that does make more sense to me.

  My bond holdings are via funds tracking the FTSE Actuaries UK Conventional Gilts All Stocks Index; would this approximate that kind of behaviour? One of the funds has a factsheet here https://www.blackrock.com/uk/individual/literature/fact-sheet/blackrock-uk-gilts-all-stocks-tracker-fund-class-d-accu-gbp-factsheet-gb00b83hgr24-gb-en-individual.pdf?siteEntryPassthrough=true&locale=en_GB&userType=individual which gives an “effective duration” of 10.17 years (borderline short dated) but a “nominal weighted average life” of 15.03 years (not short dated); I’m not sure which is relevant.

  Would this perhaps be the Vanguard explanation you had in mind? http://www.vanguard.com/pdf/icrrol.pdf If not, if you or anyone else can find it I’d be interested in taking a look.

  Cheers.
• 12 SurreyBoy June 4, 2016, 10:44 pm

  Steve R, the Vanguard piece i remember is a different one to what you have posted. It basically briefly said – dont worry about interest rate rises because if you hold the investment for a long time, it will survive rate increases provided there is a regular flow of bond maturities which can then be reinvested. Sorry i cannot find it.

  From a look at the Blackrock link you posted, your fund is a UK Gilt fund (govt debt). The maturity profile shows plenty of bonds maturing in 1-5 years and so on that basis it would appear to meet the constant maturity profile that the original article refers to. What im not experienced enough to know, is what constraints a gilt fund operates under (as opposed to a fund holding bonds issued by companies), and so i dont know if it can simply reinvest swiftly at the prevailing market interest rates in the way that i expect a fund holding company debt would do.

  BTW – im typing what i believe to be correct, but if someone thinks im well off beam, please do shout.
• 13 Mathmo June 4, 2016, 11:36 pm

  @Steve R — I think @SurreyBoy has explained what they are trying to say. Indeed this is the argument that Vanguard use here —
  https://personal.vanguard.com/pdf/s807.pdf
  which I think is the article you’re referring to, @SurreyBoy.

  The essence of which is — don’t worry — if it all goes down then it’ll be cheap to buy in as you roll-over. This is true, but in an odd way — which of us hopes for an asset that we’re holding to drop in value? The slight of hand in this argument is that we all desperately want bond yields to be higher and the price drop achieves this –so this calculation focuses on yield, but it’s the nominal yield increases in the fund after the initial hit. It fails to observe that means it does worse relative to the risk free rate (which has also increased). The red line in figure 4 should not be horizontal.

  The thing about bonds — whether they are bond funds or individual fixed income securities, you buy at the interest rate you buy at, and you hold to maturity (as a default). Maybe you sell out, part way along, but the default is to own the income stream and that is fixed: you know exactly what you are getting (assuming no credit risk gilts/treasuries). The fact that part of the bond fund matures doesn’t mean that you shouldn’t look at the overall fund effective maturity and use that to calculate your interest rate exposure — for each part that matures, there’s part that continues on. If you don’t like the interest rate on day one then don’t buy: it never gets better.

  My personal view is that you should hold some fixed interest type investments in your portfolio regardless of whether you think you know better than the market how to price them. I also think that reaching for yield by diving into corporate bonds or even junk, is to simply add equity risk to a non-equity counterweight, reducing its effectiveness. The bond bit is a store of value while you wait for equities to get cheap — nothing more.

  I further think that because banks and insurers are assessed on their capital requirements, and part of that give s special status to government bonds, as well as the fact that the central bankers current mode of cash-printing is to buy these bonds, bond prices are being driven up beyond what people like us want to use them for: for me they are an investment — for a bank they are an absolutely essential way to print money. Of course the bank pays more than I do.

  You shouldn’t take this as a “you’re stupid if you hold bonds” comment, please. This theory has cost me dearly over the past 3 years as bonds have behaved reprehensibly… They were probably out on the lash with TI.
• 14 magneto June 5, 2016, 12:36 pm

  @Mathmo
  Interesting comments.
  The more this investor learns about bonds, esp bond funds, the more gaps in understanding are revealed.

  1. ” The essence of which is — don’t worry — if it all goes down then it’ll be cheap to buy in as you roll-over. This is true, but in an odd way — which of us hopes for an asset that we’re holding to drop in value?”

  Re 1. Yes, bond investors seem intent on ignoring capital losses in bonds esp funds, concentrating instead on total return charts which mask those losses.
  An investor drawing the income in full might not be quite so pleased!?

  2.1 “I also think that reaching for yield by diving into corporate bonds or even junk, is to simply add equity risk to a non-equity counterweight, reducing its effectiveness.
  2.2 The bond bit is a store of value while you wait for equities to get cheap — nothing more.”

  This is a fair summary, to which would only demur on corporates and possibly yet unmentioned duration.
  Re 2.1 Present yield gap on Short-Term IG Corps versus Short-Term Gilts seems to unduly favour the former today.
  Re 2.2 Going longer on bond duration (to seek -ve correlation, etc) as commonly practised by investors, might prove counter-productive, to that proverbial “store of value”.

  All Best
• 15 Steve R June 6, 2016, 9:01 pm

  Thanks @Mathmo @magneto for your comments. To be honest I’m still a bit confused, but I think I’m confused about much more subtle and advanced things than when I started; my original confusion at least has been addressed. So this is progress. 🙂 I heartily echo magneto’s comment: “The more this investor learns about bonds, esp bond funds, the more gaps in understanding are revealed.”

  Cheers!
• 16 The Investor June 6, 2016, 9:26 pm

  Thanks for chiming in with the bond comments guys. I think you’ve got the gist across, although I can see why some of the detail might have raised more questions than it answered, and there’s a couple of things I’d follow-up on. Perhaps I’ll try to do a 101-type article on them.

  For now here’s some more stuff on bonds, including (if you look at the dates) some excellent illustrations of why you should take with a pinch of salt the perennial claims by (often otherwise passive) investors that bonds are “clearly overvalued” or people are buckling up for capital losses or whatnot.

  I have little doubt yields will move higher in my lifetime, likely much higher and I suspect it will begin sooner rather than later, but it’s all finger in the air guesswork. Easy to sound clever, hard to be right.

  Check out the dates on the relevant articles in this list — and keep in mind we’d been really patient in even *addressing* this issue. Many pundits/bloggers had been calling for an imminent bond crash since 2009.

  (Indeed, my article in 2008 hardly covers itself with glory! 😉 But I am a learning machine, and it keeps me humble to be reminded of this).

  http://monevator.com/tag/bonds/
• 17 Mathmo June 9, 2016, 4:02 pm

  “Easy to sound clever, hard to be right.”

  I wonder if that can be adopted as a family motto… Probably sounds great in Latin. 😉