Corporate Bonds Go Mainstream

Corporate bonds have long been the preserve of institutional investors, primarily because the issues available started at £100,000 upwards and too few retail investors were able to invest at those levels without committing a significant amount of their portfolio to one asset.

However, access to corporate bonds is becoming more open to retail investors, and a better understanding of this sector should lead to a greater appeal for both direct and indirect – through bond funds – investment.

The appeal is easy to see in the current low-interest rate environment as the search for yield becomes paramount to offset real-terms losses against inflation. With the advent of the Order Book for Retail Bonds on the London Stock Exchange and organisations like WiseAlpha which creates accessibility for investing in corporate bonds for as little as £100, the appetite for this sector is growing.

As part of a balanced portfolio, corporate bonds make real sense. Not only do they offer some oblique exposure to equities – in the sense that it is a company’s ultimate performance you are investing in by ‘lending’ it money, albeit with the caveat that you will receive interest at a fixed rate and your money back at maturity – you also should receive more yield than you currently would for cash. It presents a handy halfway house that should, providing the bonds perform as expected, be lower risk than direct equity investment.

But the risk level all depends on the type of bond you go for. Investment grade is a lower risk bond but will present a lower return. High-yield bonds – also known unfavourably as ‘junk bonds’ – present a higher risk of default but offer greater returns to compensate for the risk.

Of course, no investment is completely without risk and when you consider the Financial Services Compensation Scheme (FSCS) doesn’t cover losses from direct corporate bond investment, that presents a much higher risk than cash.

The other benefit of this is that the risk you are taking with the investment can be mitigated through traditional diversification techniques across multiple bonds and the expertise of the fund manager in choosing the ones most likely to perform as expected.

A greater understanding of corporate bonds will make them a more mainstream investment choice for retail investors, which will be a good thing for all. But the additional benefits of investing through a corporate bond fund are not to be missed and should help to boost this sector as a whole.

Please get in touch with Blackheath Capital on +44 (0) 20 3880 6640 or by email on info@blackheathcapital.com should you have any queries on any of our own funds or regulatory services.

Blackheath Capital is also raising funds for its own Dublin-based Global Income Fund, and anyone who is interested in finding out more about the fund or providing seed capital at this time can get in touch with us on the details above.