Fears for corporate bond investors

 

Corporate bond funds are on most investors shopping list. They are meant to be safer than shares, investing in some of the world's biggest companies and achieving a regular income stream. No wonder that in June more than £200m were ploughed into this type of fund.

But there are growing concerns that investors' faith in these funds as an uber-safe haven could be misplaced.

The problem seems to be, according to the Financial Services Authority, one of liquidity. Instead of investors being able to withdraw their cash, there are concerns that in the future, they might not be able to access it or find that, if they can, a significant value has been lost.

So concerned is the FSA with these risks it has written to corporate bond fund managers, to see if they can meet investors' requests to withdraw money. The question, then, is should you be thinking of other ways to get an income, rather than relying on funds where you could be trapped?

"The FSA is absolutely correct to be concerned," says Peter Sleep at Seven Investment Management. He warns that if the market began to fall, investors may rush for the exit and corporate bond funds may not be able to raise enough cash to pay them back. "This has happened in the recent past with property funds, many of which closed or imposed penalties on investors wishing to sell," Mr Sleep says.

Some of these funds are very large, running into many billions of pounds. "Fund size is a crucial factor," says Rob Morgan at Hargreaves Lansdown. "A small fund should be able to buy and sell fairly easily whereas it's more challenging for a larger fund."

He adds that we may not be far away from seeing a number of funds trying to reduce incoming money. But even bond fund managers admit the ability to buy and sell corporate bonds without affecting prices – the level of "liquidity" – is bad. "Anyone who says liquidity is not a problem is lying," said Richard Hodges, the bond fund manager at L&G Investment Management.

James Foster, a bond fund manager at Artemis, also believes the FSA is right to be concerned. He says five years ago, investment banks would have happily bought the bonds, but now they are circumspect about taking this kind of risk on.

"Should investors look to sell, then the investment banks won't be there to absorb the selling," says Mr Foster. "Prices could then move with much greater volatility, falling sharply to reflect the selling pressure."

Mr Foster adds these issues could push investors to look more to equity funds in order to generate an income, although these are not without risks. "The yields on many equity income funds are not far off corporate e bonds and in many situations higher," says Mr Foster.

But equity income funds – which invest in firms which the manager reckons will pay a consistent dividend – is not without risk.

If the corporate bond market falls, it is highly likely the equity market will fall more, warns Mr Sleep. "Many of the companies in a corporate bond fund will also feature in an equity income fund," says Mr Sleep. "Whatever causes a sell-off in the corporate bond market, whether it is an economic, political or some other shock, will likely cause a sell-off in the equity market. Our advice, as always, is to remain diversified."

Emma Dunkley is a reporter for citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Sport
Australia vs New Zealand live
cricket Follow over-by-over coverage as rivals New Zealand and Australia face off
News
Zayn has become the first member to leave One Direction. 'I have to do what feels right in my heart,' he said
peopleWe wince at anguish of fans, but his 1D departure shows the perils of fame in the social media age
Life and Style
Researchers found that just 10 one-minute swill-and-spit sessions are enough to soften tooth enamel and make teeth vulnerable to erosion
health
News
i100
Arts and Entertainment
The Regent Street Cinema’s projection room in the 1920s
film
News
Leah Devine is only the ninth female to have made the Young Magician of the Year final since the contest began more than 50 years
peopleMeet the 16-year-old who has set her heart on being the first female to win Young Magician of the Year
News
Jonathan Anderson was born in Northern Ireland but now based between London, where he presents a line named JW Anderson
peopleBritish designer Jonathan Anderson is putting his stamp on venerable house Loewe
News
Andy Davidhazy at the beginning (left) and end (right) of his hike
video
News
Taylor Swift is applying to trademark song lyrics from 1989
people
Voices
The popularity of TV shows such as The Liver Birds encouraged Liverpudlians to exaggerate their Scouse accent
voicesWe exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
    How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

    How to make your own Easter egg

    Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
    Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

    Bill Granger's twist on Easter Sunday lunch

    Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
    Joe Marler: 'It's the way I think the game should be played'

    Joe Marler: 'It's the way I think the game should be played'

    The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
    Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

    Cricket World Cup 2015

    Has the success of the tournament spelt the end for Test matches?
    The Last Word: Justin Gatlin knows the price of everything, the value of nothing

    Michael Calvin's Last Word

    Justin Gatlin knows the price of everything, the value of nothing