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Balanced view needed of bonds v mutual funds

It is important that advisers consider the changes to capital gains tax in respect of the bond versus mutual fund debate.

In Money Marketing recently, Ian McLeod’s article attempted to shed some light on this. However, it is not surprising, for a represen-tative of a company selling a vast amount of bonds that his table would show life bonds as being more attractive in 17 out of 30 scenarios, while only one favoured mutual funds.

There was a major flaw in the assumptions. When comparing the performance of both products, an 8.5 per cent return on equities and a 6 per cent return on fixed interest was used. This does not take account of the difference in net returns between both options.

For example, the last three-year annualised return up to April 1 for Invesco Perpetual high-income fund was 13.63 per cent, while the same fund within Standard Life’s capital investment bond returned only 11.1per cent (source: Morningstar). This is a difference of more than 22 per cent and has taken account of the annual expenses.

In addition, the Invesco Perpetual corporate bond fund returned 2.18 per cent a year in the same period, with the same fund in the bond providing only 1.02 per cent a year, which is less than half of the mutual fund’s return.

There is a danger that life companies, while running scared of the potential consequences of lower bond sales, try to use a broad brush to promote the benefits of bonds over mutual funds. There have been quite a few articles published recently.

I had anticipated that this would happen right after the autumn pre-Budget announcement.

It may be wise for life companies to remember that quality advisers are already well aware of the comparisons, having made their own analysis, and will welcome no less than a balanced view.

Paul Scarff
Chartered financial planner Managing director Accountants Financial Services (Scotland) Glasgow


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