The increasing popularity of retail bonds has led to one leading fund manager to sound a note of caution because they may not turn out as the great investment people believe.
Stephen Snowden is co-manager of the top performing Kames Investment Grade Bond fund, and he says investors should be wary of putting money into retail bonds because they are not a fixed-income cure all.
He points out that many recent issues of retail bonds have been heavily oversubscribed by investors with most now trading at a premium above their face value.
However, Mr Snowden cautions that investors should do their homework properly and points to one major retail bond issued by National Gas in 2011 which raised more than £250 million.
He said the bond, which covers a corporate debt, was listed as National Grid PLC while the same group also listed bonds issued by National Grid Gas PLC.
ETF warning
The difference, he says, is that the former is simply a holding company capable of carrying limitless amounts of debt while the latter is a regulated utility which has limits imposed on debt levels.
The move wasn’t missed by credit rating agency Moody’s either which rated the retail bond as ‘speculative’ and the corporate bond as ‘low credit risk’.
Mr Snowden also warns investors against buying fixed income products through exchange traded funds (ETFs) and says they are poor value.
However, he also warns that any potential rise in the interest rates would be highly damaging for equities and bonds, with many bondholders facing heavy losses if the rates rose above 8%.
Despite Mr Snowden’s opinions on the retail bonds market, another firm has claimed that household brands issuing bonds has seen the market grow from £90 million to £1 billion in 2013.
Maximising mini bonds
Capita Registrars says that these loyalty or mini bonds allow investors to buy the debt issued by well-known companies such as Nuffield Health and John Lewis for a set period with a fixed annual yield.
These bonds, unlike their retail cousins, are not quoted on the London Stock Exchange.
Even though most people have never heard of these products, the appetite for buying them is rising since their returns are usually higher than a bank account.
One attraction for investors is that in addition to earning a good rate of interest, they can pick up additional benefits, such as money saving vouchers from the issuing company.
Justin Cooper, Capita Registrars’ chief executive, said: “Consumers are seeing better returns on their investment and we expect to see mini bonds grow – by 2017 the market could reach £8 billion.”
