View more on these topics

Can the bondwagon keep rolling?

As equity markets continue on their downward spiral, investors are boosting their bond weightings. According to the IMA, net sales of funds in the UK corporate bond sector reached £2.6bn last year – almost double the £1.4bn invested in UK equity income funds.

But some in the industry are less convinced by the bond story. Bates Investment Services head of research James Dalby says: “The bottom line is that investors always chase the market and it is the worse thing they can do.

“Bonds are at their peak. Investing in them is perpetuating the dangerous cycle of buying assets that have already had their best run.”

Dalby points to a portfolio weighted 45 per cent in equity income, 20 per cent in corporate bonds, 20 per cent in property and 15 per cent in cash. Over three years to last December, that portfolio neither grew nor fell. In a raging bear market, he says that is excellent performance and leaves investors well positioned to take advantage of an equity rally.

But many IFAs say they are struggling to persuade clients not to plough into corporate bonds. The main reason they cite is the potential impact a war in Iraq could have on the stockmarket, which has made investors even more nervous.

Even fixed-interest fund groups concede that bonds are not immune from volatility although they argue that different types of bonds can counter even the most hostile economic environment.

Threadneedle communications director Richard Eats says: “If the war ends quickly, Western economies could surge and inflation may become a problem. That is bad for government and high-quality bonds because the income and final payment they make will be worth less in real terms. But it is good for high-yield bonds because companies are in a better position to pay back their debts and the risks are lower.”

But if war nudged the UK into deflation, companies could find it harder to pay back debt – a situation that would favour lower-risk, investment-grade bonds. The argument is that investors always have somewhere to turn as long as they are prepared to rebalance their portfolios.

Anna Lees-Jones, who manages M&G&#39s £1.3bn corporate bond fund, says: “We have always said portfolios are too heavily weighted towards equities. Even now, the latest figures I have seen show that pension funds are almost 80 per cent in equities. That must come down. But there is a lot of retail money coming towards corporate bonds now and that is a shift for the better.”

But IFAs face a dilemma in deciding whether to advise clients to rebalance their portfolios when bonds are so expensive.

Chartwell Investment Management director Patrick Connolly says: “It needs to happen but in an ideal world it would not be now. However, there is no argument for investors to hold inappropriate asset classes simply because they are cheap. At least investors will have better balanced portfolios.”

But gilts universally get the cold shoulder. IFAs say their rates are too low, with short-dated versions offering only 3.5 per cent. Ten-year gilts will yield around 4 per cent a year.

New Star, which bought more than £1bn worth of fixed-interest funds from Aberdeen Asset Management this month, points to other unattractive areas.

Marketing director Rob Page says: “High-end investment-grade bonds are not offering much value but, with UK corporations tightening their belts and paying off debt, we believe the lower end of that universe and upper high-yield bonds offer compelling opportunities.”

Less compelling is the argument for index-linked bonds. Thousands of investors are set to lose cash when bonds mature this year but providers are still offering products with downside gearing.

Most of these bonds are now shunned by IFAs but the proportion of those sold without advice is currently around 70 per cent.

Where should investors turn? Hargreaves Lansdown says equity income funds are essential in most portfolios as they yield more than cash and most bonds, as well as providing growth. On a 10-year basis, it argues that investors should increase their exposure to this sector.

Recommended

Moving goalposts of exemption

Last week, I looked at the important conditions that must be satisfied in securing exemption from tax on redundancy payments. Having finished that analysis, it occurred to me that I really should have preceded it with a consideration of whether a payment was, by its nature, one that could qualify for the special exemptions in […]

Noble Fund Managers – Enterprise Venture Capital Trust

Friday, 7 February 2003 Aim: Growth by investing in quoted and unquoted companies Minimum investment: Lump sum £1,000 Opening/closing date: December 19, 2002/April 2, 2003 Charges: Subject to negotiation Commission: Initial 3% Tel: 080 7367 5606

Split-cap &#39spider&#39s web&#39 is biggest FSA probe

The FSA says its enforcement division has significantly widened the scope of its investigation into possible collusion between companies in the split-capital investment trust sector. Speaking at the AITC conference for directors in London this week, FSA managing director John Tiner said the FSA had stepped up the initially small investigation to encompass many more […]

PI is still crumbling

I read with interest the article by Junior Sobowale (Money Marketing, January 23).While I agree with some of the general points he put forward, I was astounded to read his observations about the professional indemnity difficulties being experienced by IFAs. These comments exhibit a total detachment from the plight that is being felt currently by […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com