View the article online at http://citywire.co.uk/money/article/a587873
Retail bonds: a good deal or too risky?
With inflation running high, corporate bonds aimed at private investors may appear a good deal. But how safe are they?
The growing trend of corporate bonds being sold to private investors has seen several well-known firms raise more than £1.4 billion from private investors over the past couple of years. But are they a good deal for investors?
The London Stock Exchange’s Order Book for Retail Bonds (ORB) was launched in February 2010 and since then several major companies have taken advantage of investors’ unfailing appetite for income while also diversifying their funding base.
The biggest deal was the £260 million National Grid inflation-linked bond issue, which raised £282.5 million. Other significant deals include a £125 million issue from Tesco Bank, and a £120 million Provident Financial issue.
Watch the video interview below with Henrietta Podd from Evolution Securities for more background on investing in retail bonds.
Buying direct versus bond funds
Clearly demand is there, but views are split on whether people think buying direct is a good idea or not – and both sides make credible points about the benefits and disadvantages versus gaining fixed income exposure through a bond fund.
Nick Johal, director of investor solutions at Barclays Capital, says retail bonds allow private investors to carry out fixed-income investments at a low cost, with buyers facing one-off broker costs rather than paying an annual management charge as they would for a fund.
‘They make the self-directed option available to more investors,’ he says. ‘Whereas most sterling bonds have prohibitively high denominations, making it difficult for private investors to build their own diversified portfolios, retail bonds are tradeable in smaller, more manageable amounts – as little as £1,000.’
Barclays Capital is one of a number of market makers supporting the ORB, along with Investec (through Evolution), Collins Stewart, RBS, Peel Hunt, Shore Capital and Numis.
Johal says the quality and size of the players involved, along with the LSE’s oversight, ensure an efficient, liquid and transparent market and one that should appeal to private investors. ‘We believe the retail bond market presents attractive opportunities to professional as well as retail investors, particularly wealth managers and stockbrokers seeking an alternative to institutional deals, where timings can be problematic and denominations restrictive,’ he says.
Worth paying for the experts?
But Stephen Snowden, co-manager of the Kames Absolute Return Bond fund, warns that the mathematics of cutting out the middleman and buying direct overlooks a number of considerations that need to be included in the investment beyond just cost alone.
‘Clearly my impartiality can be rightly questioned as it suits my profession to remain employed and for the end investor to shun directly targeted retail corporate bonds in favour of buying a corporate bond fund,’ he says.
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
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More from us
- National Grid launches first ever inflation-linked retail bond
- Inflation busting: Tesco Bank launches RPI-linked bond
- Provident Financial tempts investors with 7.5% bond
- Beware the lure of the 9.5% boutique bond
- Evolution Securities
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