Passive / low cost, bond / fixed interest funds [Archive]

View Full Version : Passive / low cost, bond / fixed interest funds

haile

15-09-2013, 10:11 PM

peat

16-09-2013, 12:07 PM

I'm interested in other posts but for my purposes Haile, and I know its not the same , for practical considerations I simply use term deposits over a range of time frames at Rabobank. I'm essentially looking for the risk free rate here.
RaboDirect also offer a global option through their funds :

AMP Capital Hedged Global Fixed Interest Fund :

The Hedged Global Fixed Interest Fund gives investors access to a multi-manager approach to investing in a diversified range of international government securities, government-related securities, corporate securities, asset-backed securities and hybrid securities in both developed and emerging markets
around the globe.
Local options include

The Harbour NZ Core Fixed Interest Fund

an actively managed investment grade bond strategy that invests predominantly in New Zealand government and corporate fixed income securities.

as its active this also is not suited to your goals - although I'm wondering how passive a bond fund can actually be??

Harbour and Tyndall both offer NZ corporate bond funds - these will be active and geographically not well diversified, but will offer fixed interest returns with exposure to interest rate fluctuations (which I assume is the purpose of a bond portfolio)

born2invest

16-09-2013, 12:09 PM

Hi everyone. I am in the process of building my portfolio and want to allocate some money in the the bond market both in NZ and overseas. Ideally I would like to invest in a passive bond fund but as far as I know these don't exist in NZ (yet?), I don't want to put my money in individual bonds as I don't have enough experience in this area. I have looked at the AMP short duration funds and it has an entry / exit fee of 0.05% and an annual management fee of 0.55% pa, has anyone got an opinion on this? What does everybody use for their bond allocation? Should I be looking at the ETF's in Aussie for international bond exposure?

Thanks !

Superlife has low cost index funds for these and every other asset class. I'm with them for my kiwisaver and I've been really impressed.

I don't invest in bonds or in any funds apart from Kiwisaver so not sure how others allocate their funds. I don't believe in diversifying into bonds or REIT's, etc.

The only two options are to use a fund or invest directly so decide between the two.

Snoopy

17-09-2013, 11:20 PM

Hi everyone. I am in the process of building my portfolio and want to allocate some money in the the bond market both in NZ and overseas. Ideally I would like to invest in a passive bond fund but as far as I know these don't exist in NZ (yet?), I don't want to put my money in individual bonds as I don't have enough experience in this area. I have looked at the AMP short duration funds and it has an entry / exit fee of 0.05% and an annual management fee of 0.55% pa, has anyone got an opinion on this? What does everybody use for their bond allocation? Should I be looking at the ETF's in Aussie for international bond exposure?

Haile, as a newbie to the bond market the one thing you must know is that when interest rates rise, the capital value of existing bonds goes down. Since interest rates are the lowest in around 70 years globally, it follows that this is the worst time in 70 years to invest in bonds.

My suggestion would be to save all management fees and keep the fixed interest portion of your investments in bank term deposits for now. The returns may not look great. But they will beat anything expert bond managers can muster over the next couple of years IMO.

SNOOPY

nextbigthing

18-09-2013, 09:36 PM

blackcap

19-09-2013, 04:19 PM

What's the advantage to investing in bonds? My understanding is they're very safe however the rates are pathetic, often just 2.5%

Why would one not just put their money in a bank account which is safe enough in NZ and collect 4.25% interest?

This is something I've never fully understood so any answers appreciated. I have purchased a text book on the subject however I suspect it's covered in sleeping pill dust as whenever I read it I tend to fall asleep.

NBT

I have often wondered the same thing. You can get more with junk bonds but then your risk profile rises sharply as well and some junk bonds do end up defaulting. May I ask however where you can get 4.25% interest in a NZ bank?

Snoopy

19-09-2013, 06:15 PM

What's the advantage to investing in bonds? My understanding is they're very safe however the rates are pathetic, often just 2.5%

I learned my own lesson on investing in bonds the hard way. Had some money in a UK sharemarket fund. Switched to a UK bond fund as I wanted the money in a year or so to help fund the purchase of a house. Then the bond market crashed....

Sure bonds over the long term are less volatile than shares, but not always. I think the main reason people go for bonds is that the fit into the financial planners idea of asset allocation. A FP will ask you how much risk (meaning volatility) you can tolerate. Then they go to some lengths to mix and match share funds with bond funds to give you appropriate volatility and return. Nice theory and pre GFC, at least for Joe Blow investors outside of NZ it made sense.

Often shares had a very low yield and to boost income a good holding of bonds was advisable. And of course to mitigate the effect of overseas currency swings many advisors suggested putting some of your 'bond' allocation into overseas bonds. Today though, with some government bonds being offered at yields as low as 1% or lower, and the certainty of capital loss as interest rates rise I believe the case for bonds is less strong. The trouble is all of this will take awhile to be rewritten into the textbooks.

There are still plenty of people out there with financial plans saying allocate 30% of assets to NZ shares 20% to overseas shares 30% to NZ bonds and 20% to overseas bonds, or something like that. So they blindly do it. I believe that in NZ, where there are several boring shares that pay high dividends you will get a much greater income stream for not much more risk than having so much in a traditional bond portfolio. This logic is even more compelling since the GFC.

SNOOPY

PS About four years down the track I eventually got my capital back out of the bond fund!

peat

19-09-2013, 10:48 PM

. Switched to a UK bond fund as I wanted the money in a year or so

PS About four years down the track I eventually got my capital back out of the bond fund!

Who made the call to switch to a bond fund with a one year time frame? This seems a bit of an error to me

In my view a one year goal requires effective cash deposits or s/t paper. If return (risk) is demanded, then maximum diversification across assets would apply.

So it may be a little unfair to blame bonds in this case, even if they did suffer at that time.

*********
Bonds are considered to generally behave inversely to equities (NB they do not always,) and that negative correlation gives them a smoothing effect when combined with an equity investment. A portfolio of bonds and equities will sometimes achieve a reduction in volatility without a significant reduction in performance. This is generally considered a good thing (easier to sleep at night). Hence the split.

However bonds can be very volatile if they have a long time frame as interest rate changes markedly affect their current value (what you can sell the bond for now).

nextbigthing

20-09-2013, 08:00 PM

I have often wondered the same thing. You can get more with junk bonds but then your risk profile rises sharply as well and some junk bonds do end up defaulting. May I ask however where you can get 4.25% interest in a NZ bank?

To be honest it was a bit of an arbitrary number to ask the general question, however rabobank do offer this rate long term.

Disc know nothing about Rabobank and still confused about bonds

PS Blackcap I think the answer is that the rates used to be much higher for bonds hence they were attractive. In the vicinity of 8%. However why people still go for it I'm not sure. Perhaps as Snoop suggests, FP's suggest it to people as that's what their textbooks tell them

Snoopy

21-09-2013, 02:56 PM

Who made the call to switch to a bond fund with a one year time frame? This seems a bit of an error to me

The Financial Planning profession are not guilty here. I made the decision to get out of my UK share fund into a 'safer' UK bond fund all by myself :-(.

It wasn't quite as bad as I made it sound though. That money was only a small part of the capital I had planned to use for that property purchase. I managed to pull enough capital from somewhere else to complete the deal.

SNOOPY

peat

21-09-2013, 07:30 PM

The Financial Planning profession are not guilty here. I made the decision to get out of my UK share fund into a 'safer' UK bond fund all by myself :-(.

It wasn't quite as bad as I made it sound though. That money was only a small part of the capital...

SNOOPY
Thanks for the acknowledgements Snoopy - so in effect you were following the lines of significant diversification as financial planners would suggest.

There are still plenty of people out there with financial plans saying allocate 30% of assets to NZ shares 20% to overseas shares 30% to NZ bonds and 20% to overseas bonds, or something like that. So they blindly do it. I believe that in NZ, where there are several boring shares that pay high dividends you will get a much greater income stream for not much more risk than having so much in a traditional bond portfolio. This logic is even more compelling since the GFC.

You're right in that the risk perception of bonds has changed. A lot more sovereign bonds are seen as fallible these days.
The thing is with bonds the risk is very variable depending on the issuer , the type and the duration - clearly in a fund you are relying on the manager to be appropriate to the stated goals and risk profile of the prospectus.

nextbigthing

23-09-2013, 06:13 AM

Does anybody know of a reputable bond on offer at the moment that's paying a healthy rate of interest?

Preferably NZ

NBT

23-09-2013, 08:53 AM

Does anybody know of a reputable bond on offer at the moment that's paying a healthy rate of interest?

Preferably NZ

NBTWhats a healthy rate of interest?

Chch is offering soon but it will be in the 5's I think?

Edit: It should have read Christchurch Airport and the minimum is 6.25%

nextbigthing

24-09-2013, 07:30 AM

Whats a healthy rate of interest?

Chch is offering soon but it will be in the 5's I think?

Edit: It should have read Christchurch Airport and the minimum is 6.25%

Interesting. Thanks CJ will keep an eye out for that one.

What's a healthy rate of interest? Well... IMHO some pretty solid companies on the NZX pay 8-9% dividends so I'd say somewhere round here?

BIRMANBOY

24-09-2013, 10:38 PM

I would suggest you spend a little time researching bonds and also do some checking on the NZ fixed interest portion on either DB or ASB. The basic facts are that when interest rates are low as they are (at moment) most of the bonds are also low. Why? The companies are borrowing money and will pay as little as they can (to us). If they could borrow the money cheaper they would so the rates are always set as a compromise...has to be attractive in comparison to other investment options so they get takers ...but certainly not so much that they get themselves in trouble paying it back. Any company offering the rates you are looking for would be a very dodgy exercise......extremely attractive of course...but you know what they say abould too good to be true. The most recent one I have was INFRATIL IFT190 which came to market paying 6.85% . You can buy this on market say for 10,000 worth at 9870.46 plus accrued interest 28.23 plus brokerage of 54.99 for total of 9953.68. So you have a bond paying 6.85% of 10,000 on an investment of 9953.68 which equates to a gross return before tax of 6.88%. Thats just one example...now the thing to remember is this bond has a life to 2022. If interest rates go up your options are going to be selling on open market at a loss to your original cost or holding till maturity or another option if its in the small print..... Bonds require considerable knowledge...I'm not saying I have it...but I am saying they require some time and effort in coming to terms with the plus and minus

Interesting. Thanks CJ will keep an eye out for that one.

What's a healthy rate of interest? Well... IMHO some pretty solid companies on the NZX pay 8-9% dividends so I'd say somewhere round here?

nextbigthing

25-09-2013, 07:40 AM

Thanks Birmanboy. It's a work in progress

born2invest

27-09-2013, 11:35 AM

Does anybody know of a reputable bond on offer at the moment that's paying a healthy rate of interest?

Preferably NZ

NBT

Take your pick...

APM010 (https://www.nzx.com/markets/NZDX/bonds/APM010)
15/03/2016
11.30%

TWC010 (https://www.nzx.com/markets/NZDX/bonds/TWC010)
15/04/2014
7.40%

UOC010 (https://www.nzx.com/markets/NZDX/bonds/UOC010)
15/12/2014
7.10%

IFT190 (https://www.nzx.com/markets/NZDX/bonds/IFT190)
15/06/2022
7.05%

IFT090 (https://www.nzx.com/markets/NZDX/bonds/IFT090)
15/02/2020
6.80%

IFT180 (https://www.nzx.com/markets/NZDX/bonds/IFT180)
15/11/2018
6.30%

IFT160 (https://www.nzx.com/markets/NZDX/bonds/IFT160)
15/06/2017
6.25%

TPW110 (https://www.nzx.com/markets/NZDX/bonds/TPW110)
15/09/2019
6.20%

ZEL030 (https://www.nzx.com/markets/NZDX/bonds/ZEL030)
15/11/2019
6.20%

IFT170 (https://www.nzx.com/markets/NZDX/bonds/IFT170)
15/11/2017
5.95%

FBI120 (https://www.nzx.com/markets/NZDX/bonds/FBI120)
15/03/2019
5.90%

ZEL020 (https://www.nzx.com/markets/NZDX/bonds/ZEL020)
15/08/2018
5.85%

FBI110 (https://www.nzx.com/markets/NZDX/bonds/FBI110)
15/03/2018
5.80%

AIA120 (https://www.nzx.com/markets/NZDX/bonds/AIA120)
13/12/2019
5.60%

IFT150 (https://www.nzx.com/markets/NZDX/bonds/IFT150)
15/06/2016
5.60%

VCT070 (https://www.nzx.com/markets/NZDX/bonds/VCT070)
15/06/2017
5.60%

WIA010 (https://www.nzx.com/markets/NZDX/bonds/WIA010)
15/11/2013
5.50%

FBI070 (https://www.nzx.com/markets/NZDX/bonds/FBI070)
15/05/2016
5.40%

AQN010 (https://www.nzx.com/markets/NZDX/bonds/AQN010)
1/04/2019
5.35%

FBI100 (https://www.nzx.com/markets/NZDX/bonds/FBI100)
15/03/2017
5.35%

IFT070 (https://www.nzx.com/markets/NZDX/bonds/IFT070)
15/11/2015
5.35%

TPW070 (https://www.nzx.com/markets/NZDX/bonds/TPW070)
15/12/2015
5.30%

AIR010 (https://www.nzx.com/markets/NZDX/bonds/AIR010)
15/11/2016
5.25%

PWC090 (https://www.nzx.com/markets/NZDX/bonds/PWC090)
28/09/2017
5.25%

TPW060 (https://www.nzx.com/markets/NZDX/bonds/TPW060)
15/03/2014
5.25%

SKC030 (https://www.nzx.com/markets/NZDX/bonds/SKC030)
15/05/2015
5.24%

TRP010 (https://www.nzx.com/markets/NZDX/bonds/TRP010)
30/11/2018
5.24%

TPW090 (https://www.nzx.com/markets/NZDX/bonds/TPW090)
15/12/2016
5.20%

TRP020 (https://www.nzx.com/markets/NZDX/bonds/TRP020)
6/09/2019
5.20%

GFZ010 (https://www.nzx.com/markets/NZDX/bonds/GFZ010)
16/05/2016
5.19%

MEL020 (https://www.nzx.com/markets/NZDX/bonds/MEL020)
16/03/2017
5.15%

FBI060 (https://www.nzx.com/markets/NZDX/bonds/FBI060)
15/05/2016
5.10%

FBI090 (https://www.nzx.com/markets/NZDX/bonds/FBI090)
15/03/2015
5.10%

TPW100 (https://www.nzx.com/markets/NZDX/bonds/TPW100)
15/12/2017
5.10%

ZEL010 (https://www.nzx.com/markets/NZDX/bonds/ZEL010)
15/10/2016
5.10%

AIA110 (https://www.nzx.com/markets/NZDX/bonds/AIA110)
17/10/2017
5.00%

FBI050 (https://www.nzx.com/markets/NZDX/bonds/FBI050)
15/05/2014
5.00%

NZP010 (https://www.nzx.com/markets/NZDX/bonds/NZP010)
15/11/1939
4.90%

AKC060 (https://www.nzx.com/markets/NZDX/bonds/AKC060)
18/12/2018
4.85%

WHS010 (https://www.nzx.com/markets/NZDX/bonds/WHS010)
15/06/2015
4.85%

AIA080 (https://www.nzx.com/markets/NZDX/bonds/AIA080)
15/11/2016
4.80%

AKC050 (https://www.nzx.com/markets/NZDX/bonds/AKC050)
29/09/2017
4.75%

GOV410 (https://www.nzx.com/markets/NZDX/bonds/GOV410)
15/04/2023
4.73%

TPW080 (https://www.nzx.com/markets/NZDX/bonds/TPW080)
15/12/2014
4.65%

GOV390 (https://www.nzx.com/markets/NZDX/bonds/GOV390)
15/05/2021
4.55%

TCN550 (https://www.nzx.com/markets/NZDX/bonds/TCN550)
15/06/2015
4.50%

TCN490 (https://www.nzx.com/markets/NZDX/bonds/TCN490)
22/03/2016
4.45%

PWC060 (https://www.nzx.com/markets/NZDX/bonds/PWC060)
29/06/2015
4.35%

GOV400 (https://www.nzx.com/markets/NZDX/bonds/GOV400)
15/03/2019
4.26%

GMB010 (https://www.nzx.com/markets/NZDX/bonds/GMB010)
19/06/2015
4.25%

TCN520 (https://www.nzx.com/markets/NZDX/bonds/TCN520)
15/06/2015
4.25%

FCG020 (https://www.nzx.com/markets/NZDX/bonds/FCG020)
4/03/2016
4.20%

AIA070 (https://www.nzx.com/markets/NZDX/bonds/AIA070)
7/11/2015
4.16%

VCT050 (https://www.nzx.com/markets/NZDX/bonds/VCT050)
15/10/2014
4.15%

CEN010 (https://www.nzx.com/markets/NZDX/bonds/CEN010)
15/05/2014
4.00%

MEL010 (https://www.nzx.com/markets/NZDX/bonds/MEL010)
16/03/2015
4.00%

GOV380 (https://www.nzx.com/markets/NZDX/bonds/GOV380)
15/12/2017
3.93%

FCG010 (https://www.nzx.com/markets/NZDX/bonds/FCG010)
10/03/2015
3.88%

AKC040 (https://www.nzx.com/markets/NZDX/bonds/AKC040)
15/09/2015
3.76%

AKC020 (https://www.nzx.com/markets/NZDX/bonds/AKC020)
24/03/2015
3.64%

AIA100 (https://www.nzx.com/markets/NZDX/bonds/AIA100)
27/11/2014
3.60%

AIA090 (https://www.nzx.com/markets/NZDX/bonds/AIA090)
28/02/2014
3.27%

ANB080 (https://www.nzx.com/markets/NZDX/bonds/ANB080)
9/06/2014
3.25%

GOV360 (https://www.nzx.com/markets/NZDX/bonds/GOV360)
15/04/2015
3.02%

AKC010 (https://www.nzx.com/markets/NZDX/bonds/AKC010)
24/03/2014
2.93%

GOV290 (https://www.nzx.com/markets/NZDX/bonds/GOV290)
15/02/2016
1.77%