Moneyspider in the News

Bubble bursts for corporate bond funds?

Moneyextra.com

Turmoil in the global corporate bond (CB) market is set to have a ruinous knock on effect for thousands of private investors, as values are forecast to plummet even further. Indeed, as rising interest rates have propelled bond managers both in the US and the UK to a frenzy of sell off activity, new data by fund analyst Moneyspider.com reveals that investors in the second most popular ISA sector (Investment Management Association (IMA) data, April 07) have been hit badly - and are lagging massively behind the supposedly much riskier UK all Companies sector.

A £5,000 investment in bottom of the pile performer Virgin Money's Income fund, for example, would have produced a gain of just £600 in the five years from May 2002 - May 2007.

And investors in HSBC's Corporate Bond - another rock bottom fund - with £559 million invested would have done little better, scraping a profit of £843 on £5,000 over the same period.

All three funds score the lowest 'E' rating on Moneyspider.com's rating system, which compares performance over crucial one, three and five year periods and delivers analysis on the overall performance of the fund over the typical five year investment period.

Yet investors in ostensibly more volatile and high risk UK All Companies sector (accounting for nearly a third of all UK ISA's, IMA April 07) have fared better.

Indeed, investors with £5,000 in Old Mutual's UK Select Mid Cap fund, which gets a Moneyspider.com 'A' rating, showed a profit over five years of £9,357 - a 187% increase over the same period as the supposedly low risk corporate bonds.

Even putting the same amount in Halifax's Web Saver account (£1,188.45 gross, £950.83 net) over an identical period would have comfortably outperformed Virgin, Nationwide and many other CB's.

"The fact that the base rate has been so historically low over the past five or so years has 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" said Moneyspider.com's managing director Bill Ross.

Ross adds that corporate bonds are often sold to low risk investors, who are invariably under the impression that they can enjoy higher income than they can get in a standard savings account, plus some capital growth.

"The problem is that the ordinary ' Joe Average' investor has caught a very bad cold by assuming not unnaturally that putting savings into corporate bonds would achieve a higher return than keeping them in the bank."