Asset Allocation

Okay, still can't open the article though.

 

Here's a snippit

Cont...

 

Thanks for that, thinking maybe I'm sorry I asked . Might have to re-think the bear thing.

 

Bear just heading home

 

I’ve previously been a fan of bonds, and mine certainly did their job during the 2020 Covid slump.

However, I became increasingly dubious once the first sniffs of rate rises started earlier this year.

I obviously wasn’t alone as bond prices had started slumping well before then.

So I sold all my bond funds (I had about 40% of the portfolio in bonds, mostly sovereign but also some corporate) and put about half in cash and the rest in boring dividend funds.

Until the recent plunge in shares I felt dead clever. But even now with that I’m more comfortable with the 15% drop in shares than I was with the 10% drop in bonds.

I can see shares going back up. Otherwise I wouldn’t own them.

But every time I think bonds have surely reached their nadir I remember interest rates are still less than half their longterm average. So I am very dubious still about the medium term prospects for bonds unless it is a pure income play.

Even floating bonds like QPON have failed to deliver. The yield is no better than cash currently, and the return worse.

If you buy back into bonds purely on the basis that you’ll hold to maturity fine. But their other role as ballast against volatility and ready funds to buy the dip is a real stretch for me these days.

The return from the big chunk of cash I have sitting in my Nabtrade HIA still isn’t great. But it is vastly better than the ‘safe’ bonds I used to have.

GIven our current lifestyle inflation isn’t a real issue, so I’m basically looking forward to more mean reversion where 4% on cash is achievable

 

Bonds definitely acting differently than they did during the covid correction with all these other factors in play in today's markets. If Index Funds are self-cleansing, then bond funds are self-correcting. Income is going up, which is only possible if the price drops

What Would a Bursting Bond Bubble Look Like?

Bond Massacre, Inflation Prick Biggest Bond Bubble in History

Dear Mr. Greenspan:A Bond Bubble? Really?

 

Never having an allocation in the past, bonds were too expensive for me to get set until recently but effective yields are now close to 4% which will do me to establish the position. Once I have finished building into my 5% allocation I will be sitting tight. The theory @Redwing has been posting is relevant for a long term bond holder. I suspect if a person feels they have to vary an allocation once its set then the asset class may not be fully understood or perhaps not be right sized to their needs. I don't particularly like bonds but in my judgement and for our situation, a small amount will make our portfolio more resilient to certain shocks once an income stream is commenced, so they get a gig.

You have had a positive result getting the the run up in bonds as interest rates hit zero and side step the correction back to more normal interest levels. But it's probably no reason to swear of bonds if 40% was anything close to right for you in the past.

 

The comment earlier about VDHG as a sole investment and Dunno’s response about Oz Super is interesting.

Whilst both are diversified, and both are set and forget they aren’t equivalent.

VDHG is the core of my non-super portfolio. And Australian Super Balanced is where my super resides.

I have about the same in each.

Over any period I can test, the return from Oz Super stomps over that from VDHG.

I would love to be able to put my VDHG pot into Oz Super, even without the tax breaks.

I’d like even more to be able to put it into the Future Fund.

VDHG is the only real alternative currently. But it is a grudging one.

 

Falcon, are you accessing the DFA funds via an exchange such as IBKR? The conversion fees from AUD to USD and vice versa (when paid dividends) seems to be a real cancer on fees anywhere other than IBKR.

I'm using 3 Avantis SCV funds but considering adding an ASX-domiciled etf such as VVLU instead, noting it's not as targeted, but adds simplicity.

 

Hi mate, DFA funds used are AU domiciled accessed via BT Panorama.

 

Since this thread has gone a bit quiet… I thought I’d ask collective thoughts on VGAD vs VGS.

My target is a simple 50/50 VAS/VGS, I am underweight international and keep purchasing roughly monthly. However I long had a mental note to revisit purchasing VGAD when AUD hits 0.67-0.65 against USD. On one hand, with the likes of VDHG having a fixed hedged allocation, will having a dynamic allocation based on arbitrate rate amount to an active forex stance?

On the other hand, long term it’s all supposed to be a wash minus the fees and hedging income or losses, but the latter shouldn’t be that big of an issue as we can purchase VGAD in partner’s name.

Just trying to balance the simplicity of VAS/VGS vs adding a hedged component as it seems to be a reasonable option, and keen to hear on how everyone is managing their hedged vs unhedged allocation.

 

Saw this comment and decided to take a look. As you'd know, the ETF class (VDHG) has only been around since 2017, but the wholesale managed fund has been around since 2002. We can sub in the wholesale MF post fee 10 year and get a fair comparison as below ;

As at 30/6/22

AustralianSuper High Growth 1/3/5/10 Years
-3.93%
6.32%
7.99%
10.28%

Vanguard VDHG* 1/3/5/10 years
-8.96%
4.68%
7.54%
10.2%

I'd be very curious to see what the since most recent inception (Vanguard, 2002) for both would be. I expect there will be little in it. I also think the unlisted valuations in the mix with AusSuper give them a helping hand recently that Vanguard's marked to market exposures dont get the benefit of....They've also been big beneficiaries of cap rate compression in their unlisted RE and Infrastructure portfolios. I expect this might come undone a bit in the next few years and long term I expect very little between them. Having said that, AusSuper is a good product.

 

I run a naive 50/50 VGS/VGAD for International Large Cap exposure, as I have additional International unhedged exposures and wanted to keep total portfolio unhedged exposure circa 30%.

 

I remember running the comparison when @sfdoddsy posted but didn't reply. If I had, I would have said basically exactly what you have. Very little difference long term and shorter-term differences well within the 'play' of unlisted valuations. Both appear functionally similar, solid asset allocation implemented reasonably efficiently. Aus Super a touch less transparent, but then they can make investments you can't do as effectively individually and to get access to that you have to wear a little fog.

 

I have a single allocation to VGS/VGAD and buy the hedged version when I perceive the US$ to be expensive (like now). I don't sell VGS to buy VGAD, just new purchases in VGAD. My view is that letting the purchase decision be dynamic won't differ hugely from a static FX allocation in the long run, but it helps me not baulk at maintaining international diversification because of currency. One day I hope to be making necessary sales in VGAD when the AUD seems overly supported plus VGAD also naturally trims through income distribution from the hedging as the AUD rises.

 

You need to compare apples with apples. The AustraliaSuper returns above are after tax and franking credits are applied whereas the Vanguard numbers are before tax and I believe franking credits.

This Vanguard page does publish after tax performance but only as of Sep 30.
Products

There is also the Australian Super Pension (zero tax) returns, but I think you might still have franking credit differences against raw Vanguard returns making them look worse than they actually are.

AustralianSuper High Growth 1/3/5/10 Years (Pension)
-4.24%
6.93%
8.75%
11.37%

We might be able to get an apples to apples comparison once Australia Super publishes results for Sep 30.

 

You can get 30/6 pretax numbers for both. I did.

 

I'm targeting a AUD/unhedged total portfolio of ~50/50 (currently 53/47). This is achieved via a mix of 20% of equities being VAS + Property + Cash, so no hedged equities.

Might reconsider as we sell down property in the future, however more than likely will add hedged bonds as we retire debt to maintain currency exposure. Not a fan of hedged equities, particularly with the lack of ToFA in VGAD and IHVV

 

Are you sure? These numbers appear to be from the Super & TTR income table at Super Returns Performance | Charts & Tables | AustralianSuper which are after tax. If you click on the Account based pension tab you will see them increase.

From

AustralianSuper High Growth 1/3/5/10 Years (Super)
-3.93%
6.32%
7.99%
10.28%

to

AustralianSuper High Growth 1/3/5/10 Years (Pension)
-4.24%
6.93%
8.75%
11.37%

 

Ah got your point. Aus super numbers are juiced by franking. More work required.