Bond ETF for UK investor skeptical of GBP future

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rohitiiml
Posts: 30
Joined: Wed Nov 21, 2018 4:16 pm

Bond ETF for UK investor skeptical of GBP future

Post by rohitiiml »

Hi, I am 39 years old and have been at 100% equity allocation for some time and as is also written in my IPS. I have been pretty indifferent to market downturns and not reacted at all to negative price movements - if anything i have been positively reacting to negative market movements, given my 15+ years of accumulation remaining and regular buying.

I have long intended to move 20% of the portfolio to bonds and I think the time is right now. 20% because it is small, but not nothing. It seems 100% equity vs 80% equity returns are similar but volatility is materially different. I know this is a form of market timing, but I could not get myself to buy bonds in the last few years when rates were near zero. Now I can see the logic with VAGP YTM at 5.1%, I am planning to move to an 80:20 allocation - confident I can stay here till the age of 50.

I am based in London, expect future expenses to be 50% GBP, 50% global mix of currencies. Both me and spouse are employed full time, saving 80%+ of income. Significant LBYM mentality. Low cost lifestyle. Mortgage free home.

For the 20% of bonds, the only good option in UK seems to be VAGP - https://www.vanguardinvestor.co.uk/inve ... g/overview

However, this is GBP hedged - I had a couple of questions on this

1. I believe GBP is in long term structural decline against most major currencies given weak economy, demographics etc. and that I have already enough GBP exposure (salary, house etc). Is there any way to buy the bond basket without hedging back to GBP? I really dont want more GBP exposure. I currently invest in a market cap weighted global equity portfolio so if i move 20% to a GBP asset that feels like going in the wrong direction.
2. This bond fund has no TIPS. Is that good enough? if not then what should i do?

Thanks for all your help!
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Bond ETF for UK investor skeptical of GBP future

Post by TedSwippet »

rohitiiml wrote: Fri Dec 02, 2022 12:49 am Is there any way to buy the bond basket without hedging back to GBP?
iShares SAGG?
seajay
Posts: 1656
Joined: Sat May 01, 2021 3:26 pm
Contact:

Re: Bond ETF for UK investor skeptical of GBP future

Post by seajay »

TedSwippet wrote: Fri Dec 02, 2022 3:22 am
rohitiiml wrote: Fri Dec 02, 2022 12:49 am Is there any way to buy the bond basket without hedging back to GBP?
iShares SAGG?
Nice! If I read correctly it also pays its dividends in GB Pounds, so no additional brokerage FX conversion costs if held in a ISA within which you're not allowed to hold foreign currencies (and where some brokers charge the likes of 1.75% to do FX conversions).
pennywiser
Posts: 177
Joined: Sat Jul 16, 2022 1:54 pm
Location: UK

Re: Bond ETF for UK investor skeptical of GBP future

Post by pennywiser »

It would be good to understand why you want to move to bonds - what is the objective. People usually do it because they want to decrease volatility of their portfolio and from your post it seems to be your reason too, although you don't explicitely say.

However, unhedged bonds will leave you open to FX translation risk and this will increase volatility of your bond porfolio. So you are partly negating the benefit of holding bonds (lower volatility).

You say you don't want to increase your exposure to GBP but I wonder if you actually mean you don't want to be exposed to UK economy since you are talking about weak economy. If you don't want to hedge because you believe GBP will underperform, it seem like you are also looking to increase returns by increasing risk, which again is working against the objective of decreasing volatility.

So, if you are looking for lower volatility then hedge your bonds. If you are looking for higher returns then don't hedge your bonds, but maybe it would be better to stay in equity instead.
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