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

PROMOTED VIDEO
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: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee