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
Sunday 19 September 2010
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; request a free guide on NISAs from Hargreaves Lansdown
Mark Dampier: An infrastructure fund that builds returns by taking different roads
Simon Read: Timeshare owners accuse Macdonald Resorts of land grab
Five Questions: Changes to car tax discs
How to save money: UK is crashing down the European league table for putting money away
A student's guide to financial survival: You don't have to drown in debt at university
- 1 Hilary Mantel 'should be investigated by police' over Margaret Thatcher assassination story, says Lord Bell
- 2 Stamford Hill council removes 'unacceptable' posters telling women which side of the road to walk down
- 3 Kim Kardashian 'nude pictures' leaked on 4chan weeks after Jennifer Lawrence 'The Fappening' scandal
- 4 Alex Salmond: 'The rocks would melt with the sun before I'd ever set foot in the House of Lords'
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Plebgate MP Andrew Mitchell called officer a 'little s**t', claim court documents 'exposing ex-Chief Whip's 'record of abusing police'
Archbishop of Canterbury admits doubts about existence of God
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize