Is now the time to cash in your corporate bonds?

They've given us safety and decent returns of late but is that about to change. By Simon Read

Corporate bond funds have leapt back to the top of the sales charts as investors are attracted by their comparative safety and decent returns over the past year. Cofunds, a fund supermarket, says that corporate bonds were the highest-selling sector in August. But, in fact, now could be the time to rethink your investments, according to one expert.

Independent financial adviser Brian Dennehy produces a monthly Bond Watch and in the latest he strongly recommends investors reduce the amount of money they have in corporate bond funds. Why?



"There is no bond bubble," he says. "But investors could be in trouble if they ignore the big new problem, political risk." Corporate bonds benefited when gilt yields fell, he says, but continuing uncertainty means now could be the time to cash in.



"We are still in the midst of an extraordinary financial experiment, on a global scale, and the range of possible outcomes is mind-boggling," Mr Dennehy says. "In the absence of compelling deep value, and bearing in mind the range of risks and high levels of uncertainty, it is even more important now to diversify your bond holdings."



Is he right? Not necessarily, according to Howard Cunningham, fund manager of Newton's £500m Corporate Bond funds. "It depends on your view of the world," he says. "If we're in a low or no-growth, low-inflation environment, which we think we are, even at the much reduced yields corporate bonds offer at the moment they're still an attractive investment," he says.



Sterling corporate bonds have returned over 15 per cent in the year to date. "That has exceeded expectations and we're not saying that is repeatable. But yields are low for good reasons and may stay low for an extended period, which will benefit corporate bonds."



But those worried about inflation should probably avoid corporate bonds, he warns. "Our view is disinflationary. The period of fiscal tightening that we're going through is going to lead to low interest rates for an extended time," says Mr Cunningham.



Philippa Gee, the managing director of Philippa Gee Wealth Management, says the decision to invest in corporate bonds is all about expectations. "Are you looking to invest because you think you are getting low risk plus a high yield? If so, think again, as the basic rule of the higher the yield the higher the risk really does apply.



"If you are unhappy with the interest rate you get for cash deposits then look at corporate bonds, but understand that there is a higher risk and the higher the yield produced, the more this will apply.



"If you are looking at corporate bonds because the sector has been a strong performer and you believe this is likely to continue, you will be heading for disaster," Ms Gee warns. "Corporate bonds are unlikely to be the asset class delivering the strongest return over the next few years."



Meanwhile, Mr Dennehy advises investors to diversify the lowest risk end of their portfolio, where corporate bond funds should sit. "The lower risk bucket can include gilts, global bonds, absolute return funds, and property," he says.

Expert view: Phillippa Gee, Phillippa Gee Wealth Management

"Managing your own money and wanting a split between equities and bonds? A cautious managed fund – such as Invesco Perpetual Distribution and Gartmore Cautious Managed – is a great solution. Want just one bond fund? It may be best to opt for a strategic holding, such as Jupiter Strategic Bond and M&G Optimal Income. Looking to expand your pure corporate bond holding? Then consider Invesco Perpetual Corporate Bond and Jupiter Corporate Bond."

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?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive / Foreign Exchange Dealer - OTE £40,000+

    £16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...

    SThree: Experienced Recruitment Consultant

    £20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...

    Recruitment Genius: Collections Agent

    £14000 - £16000 per annum: Recruitment Genius: This company was established in...

    Day In a Page

    The long walk west: they fled war in Syria, only to get held up in Hungary – now hundreds of refugees have set off on foot for Austria

    They fled war in Syria...

    ...only to get stuck and sidetracked in Hungary
    From The Prisoner to Mad Men, elaborate title sequences are one of the keys to a great TV series

    Title sequences: From The Prisoner to Mad Men

    Elaborate title sequences are one of the keys to a great TV series. But why does the art form have such a chequered history?
    Giorgio Armani Beauty's fabric-inspired foundations: Get back to basics this autumn

    Giorgio Armani Beauty's foundations

    Sumptuous fabrics meet luscious cosmetics for this elegant look
    From stowaways to Operation Stack: Life in a transcontinental lorry cab

    Life from the inside of a trucker's cab

    From stowaways to Operation Stack, it's a challenging time to be a trucker heading to and from the Continent
    Kelis interview: The songwriter and sauce-maker on cooking for Pharrell and crying over potatoes

    Kelis interview

    The singer and sauce-maker on cooking for Pharrell
    Refugee crisis: David Cameron lowered the flag for the dead king of Saudi Arabia - will he do the same honour for little Aylan Kurdi?

    Cameron lowered the flag for the dead king of Saudi Arabia...

    But will he do the same honour for little Aylan Kurdi, asks Robert Fisk
    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Our leaders lack courage in this refugee crisis. We are shamed by our European neighbours

    Humanity must be at the heart of politics, says Jeremy Corbyn
    Joe Biden's 'tease tour': Could the US Vice-President be testing the water for a presidential run?

    Joe Biden's 'tease tour'

    Could the US Vice-President be testing the water for a presidential run?
    Britain's 24-hour culture: With the 'leisured society' a distant dream we're working longer and less regular hours than ever

    Britain's 24-hour culture

    With the 'leisured society' a distant dream we're working longer and less regular hours than ever
    Diplomacy board game: Treachery is the way to win - which makes it just like the real thing

    The addictive nature of Diplomacy

    Bullying, betrayal, aggression – it may be just a board game, but the family that plays Diplomacy may never look at each other in the same way again
    Lady Chatterley's Lover: Racy underwear for fans of DH Lawrence's equally racy tome

    Fashion: Ooh, Lady Chatterley!

    Take inspiration from DH Lawrence's racy tome with equally racy underwear
    8 best children's clocks

    Tick-tock: 8 best children's clocks

    Whether you’re teaching them to tell the time or putting the finishing touches to a nursery, there’s a ticker for that
    Charlie Austin: Queens Park Rangers striker says ‘If the move is not right, I’m not going’

    Charlie Austin: ‘If the move is not right, I’m not going’

    After hitting 18 goals in the Premier League last season, the QPR striker was the great non-deal of transfer deadline day. But he says he'd preferred another shot at promotion
    Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

    How Isis profits from destruction of antiquities

    Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
    Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

    'If we lose touch we’ll end up with two decades of the Tories'

    In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea