Mark Dampier: Corporate bond offers the chance of excellent returns
Saturday 07 August 2010
One of the big questions I am asked almost every day is "are corporate bonds a sell?" This is a natural question given the considerable capital growth seen since their low point in early 2009. Of course there is nothing wrong in taking a profit, but I disagree with commentators that argue there is little value left.
You don't need to be an investment genius to realise that the spectacular returns of 2009 are not going to be repeated. Yet there is still value in corporate bonds, particularly in those of financial companies such as banks, where the case for investing has been strengthened by recapitalisation and a return to profitability. However, my argument for continuing to hold corporate bonds is a little different and comes from looking at the economic scenario we face.
I believe the recession (which academics point out is technically over) is only about to begin for the consumer. The one-off boost given to mortgage-holders by the lowest interest rates for more than 300 years will wear off. Wage growth will be negligible, unemployment is likely to rise and we know income tax and VAT are going to increase.
Against this difficult background it is hard to see how highly-leveraged consumers can tolerate interest rates rising by much over the next few years. With public finances in a parlous state as well, the last thing the Bank of England wants to do is squeeze households further by raising interest rates.
So with the best instant-access cash accounts offering no more than about 2.5 per cent before tax, corporate bond funds yielding somewhere between 5 per cent and 7 per cent look a very reasonable buy – especially under the wrapper of an Individual Savings Accounts (Isa) or a Self-Invested Personal Pension (Sipp), which makes the income tax free.
So his week I thought I would focus on a corporate bond fund that I believe still offers the opportunity for excellent returns. The Invesco Perpetual team under Paul Read and Paul Causer has a long and successful track record managing bond funds, and their Monthly Income Plus Fund is a flagship of the range.
It is somewhat different to most corporate bond funds in that it allows the managers to invest up to 20 per cent in UK equities, which should give it greater potential for capital growth. This component is managed by Neil Woodford and, while his investment style has had a difficult 18 months or so, I believe it is just right for the situation we are going to be in for the next few years. His portfolio is full of large, strong companies with yields around or above 5 per cent, and they should continue to thrive even in a difficult economic climate.
I don't wish to dwell on the equity part too much because this is first and foremost a bond fund, and while there is still value to be found in corporate bonds I anticipate the greater part of returns will come from income rather than capital. Presently, Read and Causer feel that many of the best opportunities lie in higher-yield bonds. Their view (which I share) is that interest rates will remain low for several years. This offers the opportunity for investors in higher-yield bonds to receive an income significantly higher than cash.
Whilst a double-dip recession could cause a rise in companies defaulting on their bonds, I think this scenario is unlikely and we will probably see an environment of weak economic growth rather than a return to recession. Therefore, defaults ought to be limited if the managers are able to pick out companies that are resilient.
Clearly, this fund is not without risk with a heavy weighting of high-yield debt and exposure to the banks. I am sure too that concerns of sovereign debt will probably come back to haunt the bond markets over the next 18 months or so. However, much of this is probably already factored into prices. With interest rates staying low, I expect large inflows into what I believe are areas with compelling yields. With a portfolio managed by three of the most talented managers in the industry this fund represents a great way to exploit the mix of income opportunities that remain.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 2 Oil tanker with $100 million cargo goes missing off Texas coast
- 4 Lady al-Qa’ida: On the trail of Dr Aafia Siddiqui, the world’s most wanted prisoner
- 5 A teacher speaks out: 'I'm effectively being forced out of a career that I wanted to love'
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
What do immigrants really think of Britain? Polish immigrant's Reddit post goes viral
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
With Douglas Carswell joining Ukip, my party has taken another giant step forward
- < Previous
- Next >
iJobs Money & Business
Highly Attractive Salary: Austen Lloyd: BRISTOL - This is a very unusual law c...
£35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...
£50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...
£60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...
Day In a Page
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
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony