Corporate bonds- risk?

tony13579 · 19/02/13 - 19:32

I went to a retirement seminar today and it has thrown the cat among the pigeons.
We have £100k that I need an income from for 10+ years
Building society =3-4% no risk
Buy-to-let= 6-8% risk of damaged to house, risk of falling or rising house prices. Lots of Argo
Corporate Bonds=7-10% income... But is there a risk factor? Do the companies need to go bust to lose my money

Can I buy 10x£10k in*
Bt
John Lewis
M&S
2 electric utilities
2 water utilities
Transco
2 banks
2 manufacturers

Splitting my exposure to any sector going bust. Utilities are almost guaranteed their income by regulators and being in a monopoly position

http://www.hl.co.uk/shares/corporate-bonds-gilts/bond-prices/gbp-bonds?sort=coupon

I would appreciate any feedback and how you are qualified to give such opinion

Thanks
Tony

Keefy-boy · 19/02/13 - 19:49

Of course there's a risk factor. The higher the return, the higher the risk. Corporate bonds are not protected by the FSA, unlike bank deposits are up to 85k, and to cash them in before maturity you need a buyer. If you pick solid companies the risk will be lower, so will the return.

By and large the company would likely heading for bust if they were to default and you would rank low on the priority of creditors.

After all that, picked sensibly, they can be a good part of a portfolio. You may want to consider equity based income distribution funds, some of them are giving very good returns at the moment, at a lower risk and easier to cash out of.

Like this one

https://www.fidelity.co.uk/investor/research-funds/fund-supermarket/factsheet/summary-adv.page?idtype=ISIN&fundid=GB00B3KB7682&UseProxy=Yes&fundname=Fidelity%20Enhanced%20Income%20Fund%20A-Income

Dahu · 19/02/13 - 20:09

tony13579 wrote: »

Corporate Bonds=7-10%

Where did you get that from? The link you provided shows max is 5-6%, and the better know names are more like 4-5%.

Xela M · 19/02/13 - 20:20

Buy to let would be my choice without a doubt, but that's because my dad made a fortune and then went bust playing the stock market. It's a huge risk and a lot of stress!

xmodz10 · 19/02/13 - 20:47

if you got a 100k my advice to you dont just invest in 1 investment type, i would say put £10,000 in bonds across 5 different companies.

60k for a buy to let mortgage

and 30k in the stock market spread across from 6 to 30 companies in different sector, you could use your isa allowance this year for shares which is around 10 grand

tony13579 · 19/02/13 - 21:05

Dahu wrote: »

Where did you get that from? The link you provided shows max is 5-6%, and the better know names are more like 4-5%.

I think you are reading the link wrong. The coupon column is annual rate they will pay. That is watered down by the price you pay for the bonds

Hsbc Holdings Plc
GBP | XS0043041879 9.875 8 Apr 2018 5 yrs 2 mths 101.054 19 Feb 2013 1.487%

IE HSBC costing 101p for a 100p which will pay back 9.8% for five years till 2018 when they will repay 100p unless they go bust.

Migster · 19/02/13 - 21:55

It's not just the risk of the company going bust you need to consider. You may also need to sell the bond in the market prior to maturity if your circumstances change and there is no guarantee that you will get the price you paid.

tony13579 · 20/02/13 - 05:26

Fair point but we have a pension income, of about 16k we would have access to other assetts and a basket of bonds would all be maturing at different dates. Our house is paid for. We have too many cars. I think £10k in the building society would cover any unforeseen disaster.

Spot · 20/02/13 - 05:36

There are very few people who don't think equities are going to do well in the next few years - of-course you never know what the very short term will bring, but at the moment we're going into a period of recovery, corporate balance sheets are very healthy, there's the potential of lots of M & A activity to boost returns and lots of people who are fed up with getting next to nothing in savings are looking to get a better return.

I'd be inclined just to keep it simple and put the money into a small portfolio of equity income funds investing in blue chip shares which typically pay 3 to 4 % at the moment, and there's a good chance that in a few years the capital will have grown quite a bit and the dividends paid out will have risen significantly as well. If you hate ever seeing anything go down, maybe this is not for you, but over the long term investments like this will serve most people well and this is probably as good a time as any to get in. Don't buy direct - go to a broker/fund supermarket who will rebate most of the commission.

Dahu · 20/02/13 - 16:18

tony13579 wrote: »

I think you are reading the link wrong. The coupon column is annual rate they will pay. That is watered down by the price you pay for the bonds

Hsbc Holdings Plc
GBP | XS0043041879 9.875 8 Apr 2018 5 yrs 2 mths 101.054 19 Feb 2013 1.487%

IE HSBC costing 101p for a 100p which will pay back 9.8% for five years till 2018 when they will repay 100p unless they go bust.

But it's the gross redemption yield that you will actually be getting, not the coupon rate. The gross redemption yield for the HSBC is 1.487%.

Having said that, the figure for HSBC didn't look right to me anyway. I've looked it up and they're redeeming that one 5 years early, which explains why the price is low compared to the coupon.

A better example is the United Utilities 2026 bond. The coupon is 8.875% but you won't get this return on your money, you'll get the gross redemption yield which is 4.183% (if held to maturity and they don't go bust).

[Deleted User] · 20/02/13 - 17:36

It's hard to give advice because this is such a big area and it all has risks. However, it looks like you are weighing up all the pros and cons which is a good start

My personal recommendation is to go for diversity to help minimise your risks. You can diversify in part cash, part property, part stocks and shares. There are other investment options like metals etc but these won't provide an income.

For instance, if you think property prices will rise over the next 10 years and you don't mind the work involved in maintaining a property, BTL could be a good option. However, as you have already mentioned, there can be downsides and it also means sinking the majority of your money into one investment which means this is a high risk strategy.

But then everything is a risk. Even in a building society, money is not safe because of inflation.

As for investing in stocks and shares, I would really recommend investing in funds rather than going direct to companies. This is because funds split how they invest into different sectors, companies and countries which lessens your risks. The bad side is that there is a management fee but this is a good trade off IMHO.

With savings and S&S, if you pursue these options, I would recommend putting everything you can into some sort of tax wrapper ie. ISAs, SIPP etc to help keep your gains.

I would also recommend holding any stocks and shares or funds with one of the S&S holders ie. Wii, Hargreaves & Lansdown etc rather than banks as the banks charge a lot more.

Personally, I am currently invested in one bond fund with a reasonable yield (for these times) which invests in all types of bonds both in the UK and abroad. Plus this bond fund can invest in assets too if it looks like investing in bonds is no longer going to be profitable.

However, this isn't my only fund. I have five others all with different aims. Some I have for growth and some for a bit of income and I regularly watch what is happening with my funds so that if I think something is about to turn bad and I don't think it can recover in the long term, I can pull out.

I would also recommend asking on the money savers forum. There are a number of people who like to invest and they will probably provide you with even more options.

Good sites to help are:
http://forums.moneysavingexpert.com/forumdisplay.php?f=17
http://www.trustnet.com/ (this latter has a list of all the many funds available)

Edit: I have just seen that you have already been given some good advice above too.

el1aine · 21/02/13 - 14:01

I'm no financial expert but I read in one of the papers only this week that the bond market could go bad soon - perhaps others have read this too, I think it was the telegraph or guardian on line?

[Deleted User] · 21/02/13 - 14:36

I'd stay well away from corporate bonds if a safe investment is what you're after. I would opt for mid-range sovereign bonds.

[Deleted User] · 21/02/13 - 14:52

el1aine wrote: »

I'm no financial expert but I read in one of the papers only this week that the bond market could go bad soon - perhaps others have read this too, I think it was the telegraph or guardian on line?

http://www.telegraph.co.uk/finance/personalfinance/investing/isas/9881233/Isa-investing-Bonds-are-no-longer-the-low-risk-option.html

Are you talking about this article El1aine?

The article recommends staying away from gilts (and I would agree) and instead look at strategic bond funds instead (and I would agree with this too - if this is what someone is looking for).

"Gilts worry me a lot. They once offered risk-free returns, now they just offer return-free risks. They are offering next to nothing in terms of current yield on 10-year bonds (around 2pc) and just a 1pc rise in interest rates would lead to a 9pc capital loss on the gilt index. If yields return to normal levels quickly, the potential losses are quite frightening."

But advisers still think investors who want income could use this year's Isa allowance to put money into bond funds – provided they are careful in their selection.

All three advisers recommend strategic bond funds, which allow the fund manager more flexibility in stock selection and have less sensitivity to interest rate changes. Mr Dampier suggests the Jupiter Strategic Bond and Royal London Sterling Extra Yield funds, yielding 5.8pc and 7.68pc respectively.

el1aine · 22/02/13 - 21:21

thanks YoungatHeart, as I said I am no financial genius! The quote is interesting but I have no idea what the difference is between strategic bond funds and others

Hey there!

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