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Julian Gibbs

I was asked recently where I am going to invest my Isa money this year. The answer is clear to me – it should be invested in a high-yield corporate bond fund. This is because, when default rates reach their highest – they are now near their peak at over

10 per cent – they recover more quickly than stockmarkets as a whole.

When the default rate was last over 10 per cent in 1991, the total return on the Merrill Lynch US high-yield index rose by 39.2 per cent and in the following year by a further 17.4 per cent.

Because of the Enron affair and the September 11th catastrophe, nearly all the high-yield bond funds have recently fallen by 10 per cent or more. I now believe these bonds funds are near a low.

Probably the safest of the high-yield bond funds are the Royal & Sun Alliance maximum income bond and the Threadneedle high- yield bond fund because of their international spread. Invesco Perpetual monthly income plus and Standard higher-income retail could also be good choices.

Those prepared to take a higher risk, which probably includes me, should consider Invesco Perpetual European high yield, which yields 11.3 per cent, along with Newton European high yield, M&G European high yield, Henderson European high yield and Threadneedle European high yield, all of which yield around 10 per cent. These funds could

be good choices because the European high-yield market is particularly undervalued but consists of many telecoms bonds which are higher risk.

The performance of high-yield bonds relates fairly closely to the equity markets, which should recover this year. I expect these funds to outperform most UK and European equity funds this year as well as giving a high yield completely tax-free through an Isa or Pep transfer.


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