Mark Dampier: Corporate bonds still worth a punt

Regular readers of this column will know how keen I have been on corporate bonds for more than a year. I admit that I was little bit too early with some of my recommendations; however, the rally that we have seen since March in corporate bonds should mean that most people are now in profit. The question I am constantly being asked at the moment is whether the rally is over or if corporate bonds are still a buy.

Clearly after a rally which has seen the corporate bond index move up over 23 per cent from its low point, it is easy to say that such performance won't be repeated over the next six months. Yet, while bonds were compelling value in the early part of the year, I still feel they look good value today.

The prices seemed to assume that we were facing a second Great Depression, but now they have risen to a point that suggests we are in for a more ordinary recession. I would not argue for taking profits, since you have to ask yourself where you will put the money. If you go back into cash then it will be more secure, but returns after tax are no more than about 1.5 per cent, if you are lucky. I believe that interest rates will stay at these low levels for at least another year (and only move up very slowly) and, on that rationale, corporate bonds are still a reasonable buy that are worth the risk.

One fund that has not had much publicity recently is the Royal London Sterling Extra Yield Bond Fund. Although the fund has been recovering of late, it has lagged behind many of its fellow, high-yield, high-risk bond funds. I therefore believe it has a little bit further to go.

As one of my colleagues put it, a quarter of the portfolio is still not going up at all and some parts are actually falling. The fund is effectively flying on three of its four engines, but even below full power the fund is currently performing well. If the other quarter gets going, the potential gain could still be significant.

Eric Holt, the manager of this fund, is one of the most dedicated investment professionals I have met. Clearly, like many bond managers last year, he made mistakes, but the market changed so much and so quickly that it would have been impossible not to be wrong-footed every now and then.

There are two main areas of the portfolio where the recovery has been very muted. One area is the building society sector.

While bank bonds have recovered significantly, bonds including those issued by Coventry, Kent Reliance, Newcastle and Nationwide building societies have suffered setbacks. In July alone this hurt the fund for some 0.5 per cent of performance. The yield on each of these bonds is now between 15 per cent and 20 per cent and Eric Holt believes they offer great value.

The other key area is structured corporate bonds. One example is Dragon Finance, the bonds of which are secured on a portfolio of Sainsbury's supermarkets. The bonds remain unchanged at 50p, despite the underlying security of Sainsbury's, which seems highly unlikely to get into serious difficulties.

Mr Holt would like to add to his positions in some of these bonds, since he believes they are fundamental undervaluations, but none are being offered to him. That tells its own story I think; existing holders want to hang on to these bargain bonds. The fund has a distribution yield of 10.53 per cent at the present time, which should scream loud and clear that this is a higher risk bond fund.

However, I suspect we have well and truly passed the worst and patient investors could be rewarded. For the record, I continue to hold this fund and, in fact, added to my own investment in it last week.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information 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

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
News
Wilko Johnson is currently on his farewell tour
people
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Voices
'Irritatingly Disneyfied': fashion vlogger Zoella
voicesVicky Chandler: Zoella shows us that feminism can come in all forms
Life and Style
health
Arts and Entertainment
Pink Floyd on stage at Live 8 in 2005. From left to right: David Gilmour, Roger Waters, Nick Mason and Rick Wright
music New album The Endless River set to overtake boyband for most pre-ordered of all-time
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

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Day In a Page

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
    Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

    'Renée Zellweger's real crime was to age'

    The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
    The 10 best smartphone accessories

    Make the most of your mobile: 10 best smartphone accessories

    Try these add-ons for everything from secret charging to making sure you never lose your keys again
    Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

    Liverpool v Real Madrid

    Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
    West Indies tour of India: Hurricane set to sweep Windies into the shadows

    Hurricane set to sweep Windies into the shadows

    Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
    Ed Sheeran hits back after being labelled too boring to headline festivals

    'You need me, I don’t need you'

    Ed Sheeran hits back after being labelled too boring to headline festivals
    How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

    How to Get Away with Murder

    Shonda Rhimes reinvents the legal drama