Corporate bonds.... Income V Risk

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

Can't buy share in John Lewis mate, no shareholders there, owned by the workers (partners). I'd probably go for Bonds or get yourself a decent broker to dabble in the shares market, that's a lot of money to spend and with the best will in the world, making money on the markets is not as easy as it sounds.

These are bonds John Lewis raised a bond to expand their empire. However I just noticed that bond only has months left.

The more you widen your portfolio, the less risk is associated with it.

As Saint g said really. Asset class is just as important as how much to put in. I work for a bank only got four letters in it so you can probably guess where and particularly I work within the wealth department. We are coming OUT of corp bonds as they deemed to be overpriced and could be about o fall in value. As are gilts. But that is not to say they are not right for you.

Risk and return are always related. There are lots of income producing funds available that are relatively low risk But producing better than cash terms. Even in the short term. We have one product/service that has produced over 11pc. But the the asset class is so varied even holds equities.

My advice is to get advice - professional advice. You will now have to pay a fee upfront but it is better overall as you know how much it will cost. No more payment by commission. My bank does have this service in house. And are not tied to their own products. Good luck.

I have requested a free ifa appointment through work ( urgently before I leave)

But the more I understand before the appointment the more I will get out of it.

It's actually something which I'm very interested in and would love to know more about.

I studied a bit about it at uni but was over a year ago now so bit rusty on knowledge and only learnt the basics in it anyway.

Look into "portfolio theory".

We have income of about 16k and this lump of cash.

We have a substantial home with teeny mortgage on which we could draw down up to 100k if an emergency required ( till 2028 )

To earn 6-10k income on bonds would be fantastic. I can't see why we would need instant access or sale of the bonds especially if their maturity dates were staggered,

I agree if you sold them mid term you could lose. I suppose if inflation and interest rates rose above 8% it could be a problem.....

I think the main opportunity in bonds has already passed, so great care is needed

However, if you are going to buy some, then ensure that you hold them to maturity otherwuise you are at risk of a capital loss

With that sort of money, may be better in a low cost bond fund rather than trying to do it yourself

I sorted the bonds on excel

I cut out the bonds with less than 2 years and more than 10 years

divided the coupon price by the purchase price

I came up with some prefered bonds of which I selected the top 10

return £ invested £ return

9.772003087 10000 977.2003087

7.577717066 10000 757.7717066

7.073279172 10000 707.3279172

6.895583923 10000 689.5583923

6.878172172 10000 687.8172172

6.875137503 10000 687.5137503

6.617820846 10000 661.7820846

6.594766799 10000 659.4766799

6.566850538 10000 656.6850538

6.510124366 10000 651.0124366

£7136.145547 income from 100k

that beats the buy to let returns

Hsbc Holdings Plc

Halifax Plc

United Utilities Electricity plc (13 years, but more solid investment)

European Investment Bank (not so sure about this one)

British Telecommunications PLC 3year

British Telecommunications PLC 7 year

Scottish Power UK Plc (government backed energy projects)

Rolls-royce Plc 3 year

Heineken 2 year

Smiths Industries 3 year

Barclays Bank Plc (ignored as 36 years)

AXA SA

Provident Financial 7%

Provident Financial

Barclays Bank Plc

Lloyds Tsb Bank Plc

Enterprise Inns Plc (not sure , pubs on the way out but money in thier property portfolio)

ICG 6.125% 2020 7 years (i know diddly squat)

UNITE GROUP PLC

Seriously recommend Hargreaves Lansdown. http://www.hl.co.uk/

There is a risk to investing in corporate bonds, which is not just to do with if the company goes bust.

If you buy the bond at issue, say £1000 for a 10 year bond with a 7% yield, then all things being equal, you will get your 7% p.a. for 10 years, and at the end of the period, they give you back your £1000. Easy.

However, if you buy a bond that is already in issue, i.e. half way through the ten year period, then the yield is different. You will still get 7% of £1000, but if the price you paid was £1050, then the actual yield is less ( 1000 x 7% = £70, but £70 on £1050 is a yield of 6.66% ) plus, although you paid £1050, you only get back £1000 at the end of ther ten year period.

The price for existing bonds is dictated by many things, but the main damage to Corporate Bonds comes from inflation. If inflation rises, the yield looks less attractive. As yields rise, the price of the bonds in the market falls. This is on top of the possibility of the company going bust.

Your IFA will porobably advise you to use a corporate bond fund, ie someone manages your money for you, buying and selling lots of corporate bonds on your behalf. This will take a lot of the stress out, and gives you a wide spread of different company bonds. However, the yield is not guaranteed, and the fund is not guaranteed to not lose money, its just that it should be lower risk than buying stocks and shares.

I am an IFA by the way.

However, if you buy a bond that is already in issue, i.e. half way through the ten year period, then the yield is different. You will still get 7% of £1000, but if the price you paid was £1050, then the actual yield is less ( 1000 x 7% = £70, but £70 on £1050 is a yield of 6.66% ) plus, although you paid £1050, you only get back £1000 at the end of ther ten year period.

Thanks, I have already worked that into my spread sheet and the numbers above are the reduced down Yeilds.

I hadnt factored in the reduction in the lump sum, so I will build that in.

Just to report my progress. I have set up my isa wrapper and transferred some cash in.

Buying the bonds is not quite as simple as I first thought. There are a three things to consider

1 You can only buy bonds with 5 years + left to run

2 bonds are sold in minimum blocks mostly 1000, but the ones I chose were10,000. Multiplied by the second had price of £1.25 cost more than I could move into the isa in1 tax year

3. You pay for the bond, you pay the seller x days interest ( 90 days in my case) and £50 dealing cost.

You need to select a short list of bonds. You need to know the block size.

If you leave say £2000 cash on your isa account for the next tax year you could buy that 10,000 block next tax year.

My initial ambitions of 8% may have been too ambitious. However I expect to build a portfolio of 10 companies earning around average 6% on the total investment assuming I hold the bonds to thier end.

Get a low cost bond fund. It will save you money as dealing charges will eat into your capital but dealing in such small blocks. Also a bond fund will be much less risky as they own dozens if not hundreds of bonds. If one defaults, it is a small fraction of the portfolio.

If you buy 10 bonds yourself and something unexpected happens and one defaults that's a 10% hit to your capital right there.

To get 6% yield you will be investing at the riskier end of the spectrum, probably in the junk space.

Personally I have been selling down my "high yield" funds and buying equities for the past few months.

Qualification: professional fund manager, running over half a billion dollars in equities.

Personally I think the stock market is in for a leap downwards. I don't think there is any thing to justify it being over 6000.

This is a 10 year income plan using 20% of our assets. Mortgage paid off. The companies are bbb rated and higher. I am happy with the risk level. I feel the capital is at less risk than the stock market or a buy to let but higher than banks building societies. I plan to hold these bonds to maturity. I am not worried if the bonds dip on the second hand market.

The income is my main importance. If I receive less income I will have to spend some/ more of the capital. £500 dealing costs is less than the 2% fees a fund will charge to invest and the Annual 1% fee on the whole fund. These fees will cost more over the10 years than if 1 company folded.

You'll have to pay custody charges as well. A bond fund will not charge you 2% fees, if you invest via a money supermarket. I use BestInvest, and these are the two junk bond funds I hold

https://select.bestinvest.co.uk/fund-factsheets/threhyb/threadneedle-high-yield-bond-c1/overview

https://select.bestinvest.co.uk/fund-factsheets/gfemu/investec-monthly-high-income-a/overview

The first one has no initial charge, 1.44% expense ratio and yields 6.1%

Second one has no initial charge, 1.36% expense ratio and yields 5.6%

With the funds you get the same yield, better risk control and lower expenses - plus it is less hassle to buy and sell.

Your choice!

I looked into bond purchase recently but found they are expensive to buy - bond funds are much cheaper. A couple of other points to consider. If buying a bond fund make sure you factor in the potential tax deduction into the return. I own a couple in my pension scheme and unreclaimable tax is deducted from the headline rate of return. I still receive about 5.2% return though so it beats inflation.

You might also like to consider infrastructure investment funds. I own 2 and they return 5%+ with very little movement in the share price. You could also consider high yielding utility shares such as National Grid or SSE yielding 5 - 6%. Again the share price isn't volatile and they might also give you a hedge both against inflation and currency risk exposure (given that Sterling is almost certain to devalue against other international currencies - that's what happens when you print money).

If you do invest heavily in fixed interest then the big risk is inflation. If it starts going up then the price of your fixed interest investment will fall and you'll suffer a capital loss. Personally I'd spread the risk with a combination of bond funds, utility shares and infrastructure funds.

Qualifications? been running my own pension fund for 22 years. Compound return 7.2% (FTSe return over the same period 4.8%).

Good luck!

I agree that bond funds are cheaper, and agree with most of what you said.

However, sterling certain to depreciate because BoE printing money? Don't be so certain - the ECB, Federal Reserve and now the BoJ are all printing money. Race to the bottom maybe - but it isn't clear the the BoE is any worse than the central banks in the other major world economies.

The one thing certain with foreign exchange rates is that nobody knows what will happen in the future, even more so than any other financial guessing.

I think Sterling's depreciation is reasonably predictable - certainly against US dollars. My company earns dollars; 2 months ago the USD/GBP rate was above 1.60 and I held off selling the USD waiting for GBP to weaken. The rate is now 1.51 and I've started selling - a GBP depreciation of over 7%. Owning shares in say Glaxo or Shell (I think both declare dividends in USD) will put up your GBP dividend receipts by the same 7% plus. And of course there's always gold; the USD price has fallen recently but it's up when expressed in GBP.

After a while your brain starts to hurt though.

I think Sterling's depreciation is reasonably predictable - certainly against US dollars.

Trillions dollars worth of of forex transactions go through every day, what makes you think you have better insight than the myriad of market participants? Predicting forex rates is a real mugs game.

The point you need to remember is the link betweeen Interest Rates & bond duration. In its very simplist terms if you have a bond that has a duration of 7 years (ie the date it matures) & interest rates go up 1% you are looking at a 7% capital loss.

Most bond funds at the moment have pulled their duartion right down to about 4 years which will give you a bit more protection. So you need to take a view on interest rates before buying bond funds.

Equities are expensive, but offer a decent yield anywhere between 3 & 4%. Long term they make sense, but you could consider drip feeding into them.

My suggestion with £100k is to see a private client stockbroker. Brewin Dolphin in Lymington are a decent bunch, but there are others - Investec in Bournemouth, Rathbone in Winchester, Charles Stanley in Southampton.

They can balance out your portfolio by blending bonds, equities, cash, property & maybe some multi asset funds.

I think Sterling's depreciation is reasonably predictable - certainly against US dollars.

Sterling has appreciated against the US dollar since your comment.... now 1.53.

Sterling has appreciated against the US dollar since your comment.... now 1.53.

You are absolutely right. I'm so distraught at this turn of event so I guess I'll have to console myself with the case of champagne I bought on the profits of selling at 1.51 rather than 1.60!

Now up to 1.56.... moving in the opposite direction to the Oracles predictions.

Try Emerging Markets Debt. Or even EM Corp Debt.