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
The best - and worst - investments in 2013
How to start your own internet business
The death of the pension: how equity release can fund your retirement
Julian Knight: We are seeing the dying days of the golden pension
Accident claims are shaken up: Insurers expect premiums to be held down by a new ruling. Ian Gregory reports
- 1 What, let gays get married? We must be bonkers
- 2 'Something passed underneath us, quite close': Airbus A320 has close encounter with UFO
- 3 Rocky Horror star Tim Curry 'suffers major stroke'
- 4 Lord of the Sings: Sir Christopher Lee, 91, to release heavy metal album
- 5 Exclusive: Woolwich killings suspect Michael Adebolajo was inspired by cleric banned from UK after urging followers to behead enemies of Islam
BMF is the UK’s biggest and best loved outdoor fitness classes
Get the latest on The Evening Standard's campaign to get London's children reading.
Win anything from gadgets to five-star holidays on our competitions and offers page.
Day In a Page
A modern home of almost 1,000sq ft is close to Stoke Newington's high street. £499,950
A five-bedroom bungalow in Hoveton with riverside garden and mooring dock, £550,000
A refurbished one-bedroom flat with south-facing reception and high ceilings. £579,950
A four-bedroom Grade II-listed house in Nazeing with large gardens. £550,000
A modern four-bedroom house in a converted stable within walking distance to Peckham Rye. £695,000
Three-bedroom house in a quiet residential area within close distance to Battersea Park. £450,000
A three-bedroom cottage within commuting distance of London, Norwich and Cambridge. £250,000
A two-bedroom cottage with a sun room and gardens in South Chard. £350,000.
A three-bedroom semi-detached house with original features including fireplaces and wooden flooring. £399,950
A modern two-bedroom flat split across two floors and close to several public transport links. £595,000
A one-bedroom flat with an open-plan reception/kitchen and private balcony. £315,000.
A bright two-bedroom garden flat between South Acton and Chiswick Park. £499,950.
A listed four-bedroom farmhouse with stables, set in four acres. £500,000.
A three-storey family home with four bedrooms and an extended kitchen/diner. £995,000.
A three-bedroom Hamstone cottage in the rolling Somerset countryside. £430,000.
A luxury one-bedroom apartment on the first floor of a converted Victorian house. £425,000.