BeeBop does UK

[GTM 3442]

Like you, BeeBop, I have a use (a need even) for pounds for use in the UK .

So, having decided that I’m going to have pounds, the question becomes where do I hold those pounds as they accumulate.

Cash? It pays nothing. But at least there’s no exchange rate risk.
Shares? That’s another post.
Bonds? Useful for diversification. I’ll put my hand up and plead guilty to a fondness for diversification across asset classes.

But there’s “quality” to consider. Having seen my mother become increasingly exposed to Hanover Finance in the early 2000s, I rate “quality” as important, and am prepared to balance interest rate against credit rating. I think of it as insurance, and am prepared to pay the premium.

Plus, at times of share market volatility, there’s a flight from shares to bonds at the asset class level, and a flight from junk to government within the asset class.

I remember in the GFC when bonds from Infratil, Hellaby, Silver Fern Farms, and others could be picked up at yields well into double figures, while NZ Government Stock went in the other direction. Government-guaranteed South Canterbury Finance bonds at a 25% yield? Oooooooh! Yes please!

But back to the point - whose bonds?

Well, if you’re looking for quality, you can’t go past government, can you? Given the world’s desperate search for yield, coupled with existing government bond interest rates globally (minimal to negative – I mean Argentina being able to sell a 100-year bond - come on!), and the likely trend, this points toward the US government, where the Fed has been raising interest rates, while at the same time the President is looking to lower interest rates. Who will win? And what will it mean for the yield curve? So I buy much but not all of the yield curve, settling on three timeframes

So for bonds, I settled on 3 timeframes:

30-90 days
3-7 years
20+ years

The various forms of tax floating around mean steering clear of the US and the UK, and the fact that I’m buying in pounds means that a US or UK domiciled fund is off the table, except for the 30-90 day US Treasury Bills, which aren’t available outside the US and the USD. Why not break the rules at the beginning, eh?

So knowing whose bonds, and knowing the duration, the currency, and the domicile, it’s simply a matter of trawling Morningstar to find the right vehicle .

iShares run appropriate ETFs out of Ireland, denominated in pounds, which suit me fine, but here are other domiciles.

The exchange rate is important

I know the average value of my pounds in USD, and it’s relatively easy to construct a matrix of fund price and exchange rate which you can plug into a spreadsheet to tell you the effect of the combination of exchange rate movements and fund prices, which gives you entry, accumulate, decumulate, and exit points. After all, if the GBP/USD goes from (say) 1.21 to 1.29, your fund is worth a whole lot fewer pounds!


GBP/USD rises, Fund price rises
GBP/USD rises, Fund price falls
GBP/USD falls, Fund price rises
GBP/USD falls, Fund price falls

So to summarize – pick your asset class, pick your duration, pick your vehicle, and work out what the effect of currency movements will be, and do daily data entry.

And never forget that timing and exchange rate are incredibly important

[Toulouse - Luzern]

Like you, BeeBop, I have a use (a need even) for pounds for use in the UK .

So, having decided that I’m going to have pounds, the question becomes where do I hold those pounds as they accumulate...


The exchange rate is important

I know the average value of my pounds in USD, and it’s relatively easy to construct a matrix of fund price and exchange rate which you can plug into a spreadsheet to tell you the effect of the combination of exchange rate movements and fund prices, which gives you entry, accumulate, decumulate, and exit points. After all, if the GBP/USD goes from (say) 1.21 to 1.29, your fund is worth a whole lot fewer pounds!


GBP/USD rises, Fund price rises
GBP/USD rises, Fund price falls
GBP/USD falls, Fund price rises
GBP/USD falls, Fund price falls

So to summarize – pick your asset class, pick your duration, pick your vehicle, and work out what the effect of currency movements will be, and do daily data entry.

And never forget that timing and exchange rate are incredibly important

Looking at the matrix, it does not look correct.

What do you think.

[GTM 3442]

Looking at the matrix, it does not look correct.

What do you think.

Dunno.

My immediate concern is with the result of the upcoming UK election, and whether to buy the FTSE in dollars, the S&P in pounds, or to sit on my hands until B-Day.