The growing trend of corporate bonds being sold at retail has seen several well-known firms raise more than £1.4 billion from private investors, but are they a good deal?
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.
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 fund.
Nick Johal, director of investor solutions at Barclays Capital, says retail bonds provide the ability to carry out self-directed fixed income investment at a low cost, with buyers facing one-off broker costs rather than paying an annual management charge.
‘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 equally to wealth managers as 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.
But Stephen Snowden, co-manager of the Kames Absolute Return Bond fund, believes 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. ‘However, I believe this is one of these areas where there is often value in paying for professional help, as by cutting out the middleman, in some cases investors may end up with greater default risk or lower yields than they bargained for.’
Snowden highlights the Provident Financial issue as an example of where fund managers can access higher yielding bonds from the same company, while still taking on the same level of credit risk. Although Kames holds the firm’s paper, he points out that five years is a long time in financial markets and the financial crisis should have taught everyone to expected the unexpected.
He also singles out the popular inflation-linked National Grid deal as being of concern because of the complexities of the bond market, with many investors possibly unaware they are lending to the unregulated parent company rather than its heavily regulated subsidiary.
‘Also, due to our greater buying power, institutional buyers should be able to transact at better levels, somewhat mitigating the annual management charge,’ he says. ‘In addition, many individual investors will struggle to achieve appropriate portfolio diversification due to the lower amounts they have to invest.’
Added to this is the question of whether investors know they can face capital gains tax charges on index-linked retail bonds unless held in an ISA or Sipp, unlike their gilt counterparts.
Whether you like them or not, it seems retail bonds are here to stay.
‘In the low interest rate environment, demand for products offering inflation-beating returns should only grow,’ Johal says.