Moneyspider in the News

Bonds are not always a safe haven in the market's storms

The Observer and Guardian Unlimited 

Bonds are generally promoted as safe investments for risk-averse investors, particually those looking for income. And they are generally less turbulent than shares; after all, they carry a fixed interest rate, or coupon, and promise to repay a set amount on maturity. But that does not mean there are no risks. 

That is not just because the company issuing the bond may get into difficulties and fail to pay the coupon or the capital when it falls due. Such a credit risk will generally be reflected in the credit rating of the bond, so buyers should know roughly what they are getting. 

It is also because, like shares, bonds are traded in the market and their price does not just reflect the status of the issuing company, it also reflects the attitudes of investors as well as the conditions in the bond market. Recently, these have been abysmal: the credit crunch has sent banks and hedge funds scrabbling for cash and they have been selling whatever they can - and prime among those things have been corporate bonds. 

The result is that their price has tumbled: James Gledhill, head of fixed income investment at New Star, says that bank debt is trading at between 70p and 80p for every 100p issued; some is even as low as 60p. That is unprecedented. Even in the depths of the technology bust at the start of the decade, bank debt never went below 95p in the pound. 

Not surprisingly, therefore, corporate bond funds have been pretty horrible. According to statistics from Trustnet, the average fund has lost 3 per cent over the past year and, given that includes the yield, which averages 4.5 per cent, the fall in capital values has clearly been pretty severe. Indeed, the past year has been so dismal that, even over three years, the average return is just 2.3 per cent and 13 per cent over five years. Simply leaving your money in the bank would have done around twice as well. 

Yet high street banks have been among the biggest promoters of corporate bond funds, according to Moneyspider, the internet service, which allows investors to monitor the performance of their investment funds. Predictably, the home-grown funds that they have been pushing have also been among the most dismal performers in the sector - all the banks' corporate bond funds carry the lowest 'E' rating under Moneyspider's fund ranking system, and all have lost money for their investors over the past year. The worst performing, Halifax's 600m-plus UK Corporate Bond fund, has lost 6.8 per cent. 

'Invariably, investors are seduced into going to the banks because they think the name is trustworthy and they want to go into the branch and talk to someone about investing, and the fact that the base rate has been so historically low over the past five or so years has given bank sales teams the opportunity to push corporate bonds as providing an opportunity to maximise income,' says Tony Ahearne, a consultant with Moneyspider. He adds that specialist fund managers will invariably do better than bank funds, which is borne out by the performance tables.