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

Finacial products from our partners
Property search
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: Mortgage Advisor - OTE £95,000

    £40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

    SThree: Trainee Recruitment Consultant

    competitive: SThree: Are you passionate about sales?Do you have a keen interes...

    Recruitment Genius: Loan Adviser - OTE £30,000

    £17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

    Recruitment Genius: Sales Assistant / Buyer

    £15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

    Day In a Page

    Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

    Tribal gathering

    Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
    Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

    Gaza, a year on from Operation Protective Edge

    A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
    Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

    Illnesses, car crashes and suicides

    Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
    Srebrenica 20 years after the genocide: Why the survivors need closure

    Bosnia's genocide, 20 years on

    No-one is admitting where the bodies are buried - literally and metaphorically
    How Comic-Con can make or break a movie: From Batman vs Superman to Star Wars: Episode VII

    Power of the geek Gods

    Each year at Comic-Con in San Diego, Hollywood bosses nervously present blockbusters to the hallowed crowd. It can make or break a movie
    What do strawberries and cream have to do with tennis?

    Perfect match

    What do strawberries and cream have to do with tennis?
    10 best trays

    Get carried away with 10 best trays

    Serve with ceremony on a tray chic carrier
    Wimbledon 2015: Team Murray firing on all cylinders for SW19 title assault

    Team Murray firing on all cylinders for title assault

    Coaches Amélie Mauresmo and Jonas Bjorkman aiming to make Scot Wimbledon champion again
    Wimbledon 2015: Nick Bollettieri - Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!

    Nick Bollettieri's Wimbledon Files

    Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!
    Ashes 2015: Angus Fraser's top 10 moments from previous series'

    Angus Fraser's top 10 Ashes moments

    He played in five series against Australia and covered more as a newspaper correspondent. From Waugh to Warne and Hick to Headley, here are his highlights
    Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

    EU 'family' needs to forgive rather than punish an impoverished state

    An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
    Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

    Gaza, a year on from Operation Protective Edge

    The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
    How to survive electrical storms: What are the chances of being hit by lightning?

    Heavy weather

    What are the chances of being hit by lightning?
    World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

    World Bodypainting Festival 2015

    Bizarre and brilliant photos celebrate 'the body as art'
    alt-j: A private jet, a Mercury Prize and Latitude headliners

    Don't call us nerds

    Craig Mclean meets alt-j - the math-folk act who are flying high