Moneyspider in the News

Bonds fail low-risk investors

What Investment

Tread carefully when considering corporate bonds as a low risk investment, financial research company Moneyspider has warned.

A £5,000 investment in Virgin Money's Income Fund would have produced a £600 gain over the past five years (May 2002 - May 2007) according to Moneyspider. Other big name banks fare nearly as badly; with £5,000 producing a £843 gain with HSBC's Corporate Bond and £849 when invested in Nationwide Building Society.

This is compared to the UK All Companies sector, where an investment of £5,000 would have produced a profit of £9,357 with Old Mutual's UK Select Mid Cap Fund over the same period.

Bill Ross, managing director of Moneyspider, said, 'Corporate Bonds are often sold to low- risk investors, who are invariably under the impression that they can enjoy higher income than they could get in a standard savings account, plus some capital growth.'

He explains that the companies use corporate bonds to effectively borrow money from investors. The amount of interest paid for this loan depends on the level of risk, which is determined by the health of the company in question. Typically, bond prices rise when interest rates are falling and vice versa. But as interest rates are currently rising, bond prices are actually falling.

'We now have a scenario where corporate bond managers are increasingly turning to riskier sub-investment grade or 'junk' bonds - yet even these are barely producing two per cent a year income, compared to around eight per cent back in 2003,' added Ross.

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