Stock Exchange launches Retail Bond Market

2nd February 2010

You may well have seen the enthusiastic press coverage of the London Stock Exchange launching a retail bond market. This gives private clients the ability to buy an individual corporate bond, which in the past would have been difficult to do as it is usually the preserve of the institutional investor. Now for as little as £1000 you can buy corporate bonds issued by companies such as Tesco, BT and GSK.

What is a Corporate Bond?

If a company is looking to raise money they will issue a corporate bond over a set period of time, say 10 years, and during that time will pay you interest on your investment, plus a promise to pay you back your original capital at the end of the term. For example GSK will pay 5.25% on one of their corporate bonds, so quite a bit more interest than you would receive from a bank deposit, thus making them attractive in the current low interest rate climate. The risk you take is that the company that issues the bond is unable to meet its interest obligations or goes bust, so they are not without risk.

The Risk

On paper this all looks very attractive to the investor. However the issue you have is that if you buy one or two direct corporate bonds you are relying on that company surviving. Most of the interest rates are fixed for the term, so when inflation kicks in and interest rates rise, it is likely that capital values on these bonds will fall (because they will be less attractive to investors), meaning that if you want to sell, your capital investment will have gone down.

I have long been an advocate of corporate bond funds, and have mentioned this regularly in the last 12 months or so. A corporate bond fund gives you access to this market, but your risk will be spread because the fund will hold many corporate bonds The interest or yield they pay is still attractive, the average being about 5%, which can be paid out or re invested. You don’t have to worry about which corporate bonds to buy as an experienced manager will do that for you. In effect you end up with less risk and more expertise.

Recent Corporate Bond Fund Performance

Two of the funds that I have held for clients have been the M & G Strategic Corporate Bond Fund, and the Invesco Perpetual Corporate Bond. The return of each fund over the last 12 months has been 21% and 26% respectively. I do not anticipate this level of growth to continue, but they certainly have some up side left, especially in a low interest rate environment.

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