I wanted to use this blog post as an excuse to exercise some creativity with the color to find some not-so-boring color theming with Trading View. I seldom make use of the ability to setup different layouts but since I saw what my colleague Glenn can do with layouts, I thought of doing something with it but in weird ways.
But most of this post is on the default Fixed Income index, the Bloomberg Global Aggregate Index.
I own the AGGU, or the iShares Core Global Aggregate Bond UCITS ETF USD Hedged Accumulating under Daedalus Income portfolio, and also the other portfolio Crystalys. You can read my personal notes where I will group all the posts on Daedalus and Crystalys in the past.
The fund forms 15% of Daedalus which actually went down to 13% because the equity holdings got bigger due to growth and my SRS-only injection over the past 2/3 years.
It is meant to:
- Provide long term expected returns.
- Earn some term and credit premiums.
- Reduce the volatility of the portfolio, especially with respect for an income portfolio. If you are a student of the Safe Withdrawal Rate (SWR) framework for income, you will realize that the optimal portfolio is closer to a 75-80% equity allocation than a full 100% one. Returns is not everything.
AGGU is chosen so that everything falls in one account, which is a IBKR LLC account. This is for ease of management.
The Global Aggregate Bond index has kind of broken even from that nasty fall in late 2021. That is about five years ago.
The chart below shows the history of the AGGU:
Since AGGU is an accumulating class of fixed income ETF, it will factor in the coupons that the ETF earn and what you see here is a total return. You would also be able to see the labels in green which are my purchases at Daedalus and the orange which is under Crystalys.
They are all around the same period of Aug to Dec 2023.
This chart is more zoom in to help see better:
The chart looks like some obscene gain but actually it is just 13%.
So what you just observe is like a 13% up 13% down then 13% up. for those that invested since inception, it will be a cumulative 16% gain but annualized it is just 1.9%.
Looking at the chart, I wonder if it makes sense to just buy the whole S$187,000 worth of AGGU at one shot. Sometimes the hindsight tells you that might be the right conclusion, and most of the time it is the actual right conclusion. Unless the market is extremely volatile in one year, few years in, you might realize it doesn’t matter that much spreading over a few months.
I shown that I am also human. Some asked how do I shift my portfolio all to ETF. Well you get part of the answer. You just made a few buys over months.
The one reason that made this “it doesn’t matter that much” work for AGGU is that fixed income as a basket, have a positive expected return if you respect the average duration of the portfolio. It is unique in that way.
Is 5 Years a Long Time to Break Even?
One of the consistent message in Investment Moats on fixed income is to think from the financial planning perspective and respect the [2 x Duration of the fixed income fund -1].
That determines if you can capture a return that is equivalent to the starting yield to maturity. It is not exact but based on research. The research comes from this paper: Constant-Duration Bond Portfolios’ Initial (Rolling) Yield Forecasts Return Best at Twice Duration.
But indirectly, respecting this would also mean that Global Aggregate Bond is strongly expected to be always positive in a longer time frame.
The effective duration of AGGU is 6.2 which means that in some hairy situations (which I think this is one of the most if not the most hairy), you should expect this to recover in 6 years.
So recovering in five years is not unexpected.
In another parallel universe, would I have implemented AGGU in end 2021?
But recovering is one thing. Most would say “I risk so much of my money then you tell me 5 years later I only break even. Why is this an outstanding investment?”
Firstly, you better fxxking check if I ever use the word outstanding investment on something like this. The beauty of the Global Aggregate bond is that its volatility is low, relative to equity and it reduces the overall portfolio volatility, making the overall portfolio more livable to own for yourself. At the same time you earn some better returns because the term is longer, the credit quality is poorer.
If we use that equation, to capture the return we have to hold it for 11.2 years which means for the next 6.2 years this is where it tries to make up the 3-6% p.a. returns.
That research isn’t wrong but do take note that the yield-to-maturity of the Global Aggregate bond at end 2021 should be on the low end.
The chart below is the yield of an 8-year higher quality corporate bond basket:
I looked at the Global Aggregate’s current yield to maturity (3.46%) and it is 1% lower than what is shown on this chart.
Back then, the yield-to-maturity of this index may be closer to 2.3% so the Global Aggregate yield-to-maturity back then could be possibly closer to 1.3%. This means if you held it for 11.2 years you would earn around 1.3% a year.
It is not easy to get a historical chart or data about the history of Global Aggregate Bond yield-to-maturity. Here is for US Aggregate bond (not global):
The US Aggregate Bond today trades at 80 bps higher than the Global. WisdomTree’s chart probably shows you where the max and min is in the past 10 years.
I wonder if something hit me, and I decide to pivot all to ETFs in 2021, would I have implemented all $187k at a yield-to-maturity of 1.3%.
Most likely I won’t honestly given that, if I understand what this means, its like buying into MSCI World at a Price-earnings of 40 times.
A person with a value philosophy like myself would find it challenging because you know you are leaning towards buying something that is most expensive relative to historical.
For this to work well (still on the equity example), many things have to go right. You may liken the current equity environment to that and I think the current equity environment is that. Profit margins and EPS growth have to support this valuation. Cannot go wrong and if it is wrong, the market will adjust the pricing (to the down)
I kind of am aware that with a yield to maturity of 1.3 for a 8 year term, 6 year duration, investment grade portfolio, this leans to the upper bound of valuation relative to history.
It would be extremely uncomfortable.
I can respect the intellectual part of the portfolio implementation but in my philosophy, I would always have a valuation layer in my system (which explains the lack of index funds in my portfolio).
How Attractive is the Global Aggregate Bond Now?
I just want to paste these two charts here so that you don’t have to scroll:
And this is the current portfolio characteristics of the Global Aggregate Bond:
The lengthier 8-year high quality market corporate bond spot rate would help you contextualize where we are relative to history.
We roughly back to those 2000 to 2008 kind of yields.
The yields doesn’t lean historically expensive or cheap.
That was my conclusion in 2023, and it still still remains that way.
And if I find myself comfortable to implement then, today is also not bad.
But I really don’t know about people. I think folks are in a phase for reaching out for term (longer maturity fixed income) and credit (poorer quality fixed income).
They were taken by surprise that interest rates could drop so fast.
Start of 2025, something like an AGGU will be a tough sell:
- Past returns look so bad.
- Short term rates is better.
If you keep investing based on rear view mirror, especially with fixed income, and not have a longer term strategy, you would find yourself being occupied by this for the next 40 years.
I think you should have a financial planning lens to fixed income and not always look at the returns. You got to think about if you want frightful episodes wondering if part of your bonds is going to default, if you are getting enough yields, you want to go in and go out so often.
The Global Aggregate Bond is pretty suitable if you have a goal that is about 10 years away and you want a lot of certainty and you won’t invest in equity.
If it is shorter than that, you got to accept a few things:
- Some drawdown.
- Potentially only breaking even.
- Potentially earning good return.
The “won’t invest in equity” is a factor here because if you are a more speculative equity person, or a more long term investor with a tactical sleeve, or just fxxking itchy fingers, perhaps a shorter duration fixed income fund would fit you better.
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Kyith is the Owner and Sole Writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, firmer wealth foundations, how to have a Passive investment strategy, know more about investing in REITs and the nuts and bolts of Active Investing.
Readers also follow Kyith to learn how to plan well for Financial Security and Financial Independence.
Kyith worked as an IT operations engineer from 2004 to 2019. Currently, he works as a Senior Solutions Specialist in Insurance Start-up Havend. All opinions on Investment Moats are his own and does not represent the views of Providend.
You can view Kyith’s current portfolio here, which uses his Free Google Stock Portfolio Tracker.
His investment broker of choice is Interactive Brokers, which allows him to invest in securities from different exchanges all over the world, at very low commission rates, without custodian fees, near spot currency rates.
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