Sainsbury's Bank is building on the Sandler proposals by offering an income Isa that invests in the Halifax Investment Management corporate bond fund, which was established in September 2002.
This Isa has a target yield of 5.75 per cent and has an annual management charge of 1 per cent. The majority of the underlying portfolio will be invested in corporate bonds rated BBB and above, although small amounts will also go into bonds below this.
Corporate bonds, particularly investment-grade bonds, are looking attractive in the current environment of low interest rates, low inflation and volatile equity markets. The underlying fund invests heavily in BBB-rated bonds, which provide a middle path between risk and reward. Investing in bonds with higher ratings would make it difficult to meet the target yield, but focusing on the high-yield market would be too risky for the cautious investor it is aimed at.
Going into BBB rated bonds means the fund can get the right mix between risk and reward. The yield on higher-grade bonds would not be enough to support this fund's target yield, and going below BBB would make the fund too risky.
Investors who are looking for higher income than is available on building society accounts might see this Isa as a tax-efficient alternative, but only if preserving the original capital is not a priority.
However, a recent survey from IFA Hargreaves Lansdown shows that although 45 per cent of investors intend to use their Isa allowance this year, only 16 per cnet of these will be investing new money.
According to Standard & Poor's, the Halifax corporate bond fund is ranked 78 out of 78 funds based on £1,000 invested on a bid-to-bid basis with net income reinvested over three months to March 7, 2003.