Moneyspider in the News

Investors turn from bonds to All Companies sector

Investment Adviser

Risk-averse investors in corporate bond funds would have fared better by buying relatively volatile and riskier funds in the UK Companies sector, according to Moneyspider.com

The fund analyst found that thousands of investors are being hit badly by recent turmoil in the global corporate bond market.

The data also showed that investors in UK Corporate Bonds, the second most popular ISA sector, are now lagging far behind the supposedly much riskier UK All Companies sector.

For example, investors who invested £5,000 in Virgin Income fund would have made a gain of just £600 in the five years from May 2002 to May 2007.

Another poor performer is the £559m HSBC Corporate Bond, which would have produced a profit of £843 on £5,000 over the same period. The data also showed that investors in the Nationwide High Income fund have only seen a gain of £849 over half a decade.

Moneyspider's data found that investors in the more volatile UK All Companie sector actually fared better over the same period of time.

Investors with £5,000 in Old Mutual's UK Select Mid Cap fund showed a profit over five years of £9357, a 187 per cent increase over corporate bonds.

Even putting the same amount in Halifax's Web saver account, would have earned £1,188 gross, £950 net, over an identical period. This would have comfortable outperformed Virgin, Nationwide and many other corporate funds.

Bill Ross, managing director for Moneyspider.com, said: "The fact that the base rate has been so historically low over the past five years or so have given fund marketers ample opportunity to push corporate bonds as providing an opportunity to maximise income, but as our data shows, investors need to tread very warily if they are not to lose even more money, especially when inflation is taken into account."

He added "We now have a scenario where corporate bond managers are increasingly turning to riskier sub-investment grade or "junk" bonds to get profits, yet even these are barely producing 2 per cent a year income, compared to around 8 per cent back in 2003."

Risk-adverse investors have traditionally stayed away from the equity market, but the solid performance of UK All Companies funds suggests that the concept of corporate bonds as being low risk is misguided.