The Lemon Fool

Hello All, another newbie question from me this time on bonds.

Can anyone give me a steer on corporate bonds as a "safe" investment to put into a SIPP? I am not chasing capital growth, I would be content with modest returns to cover inflation plus a bit. I think stability is the watchword here.

How can one evaluate the security of corporate/£ high yield/strategic bonds and gilts and index linked gilts? Your comments on general selection criteria and bear-traps to avoid would be most welcome.

Simon

EssDeeAitch wrote:Can anyone give me a steer on corporate bonds as a "safe" investment to put into a SIPP? I am not chasing capital growth, I would be content with modest returns to cover inflation plus a bit. I think stability is the watchword here.

With corporate bonds, individual ones at least, you have Company risk. You get modest if stable returns, but with the risk of a partial or complete default. You can avoid Company risk by going into ITs, ETFs or OEICs. As always with "funds" it's at the cost of paying someone to manage it. ITs and ETFs investing in corporate bonds are a bit thin on the ground, so OEICs give a wider choice.

Inflation linked corporate bonds are very rare and inflation linked government bonds offer a negative real return at the moment. You can get a yield on corporate bonds above inflation but if you buy the longer dated issues, there's the risk of the price drop if the general level of interest rates rise or if the spreads between bonds and gilts widen.

Alaric wrote:

EssDeeAitch wrote:Can anyone give me a steer on corporate bonds as a "safe" investment to put into a SIPP? I am not chasing capital growth, I would be content with modest returns to cover inflation plus a bit. I think stability is the watchword here.

With corporate bonds, individual ones at least, you have Company risk. You get modest if stable returns, but with the risk of a partial or complete default. You can avoid Company risk by going into ITs, ETFs or OEICs. As always with "funds" it's at the cost of paying someone to manage it. ITs and ETFs investing in corporate bonds are a bit thin on the ground, so OEICs give a wider choice.

Inflation linked corporate bonds are very rare and inflation linked government bonds offer a negative real return at the moment. You can get a yield on corporate bonds above inflation but if you buy the longer dated issues, there's the risk of the price drop if the general level of interest rates rise or if the spreads between bonds and gilts widen.

I should have been specific in my question, sorry. My intent is to only look at IT's, ETF's and OEIC's.

Two investment trusts to consider would be City Merchants High Yield (CMHY) and New City High Yield (NCYF). Both of these invest in the higher yielding end of corporate debt. CMHY currently yields 5.24% and NCYF yields 7.4% but has slightly higher charges.

I would be weary of NCYF. Junk bonds trading at a premium is something I now avoid.

I'd agree with that - looking at the NCYF, its very volatile - you might as well buy equities. The CMHY was much more stable, like you'd want if investing in bonds.

Gadge wrote:Just took a quick look on iShares fixed income offers and it is called IS15 and is 0 to 5 years duration.

I wasn't previously aware of this one which looks good to me. LQDH offers investment grade Global corporate bonds in US dollars but hedged back to Sterling. It is on 2.59 % yield which is ok for investment grade bonds today.

https://www.ishares.com/uk/individual/e ... -ucits-etf

Gadge

Whoa, I would not rush into LQDH without taking a really good look at it first. LQDH is interest rate hedged, which essentially means it has near zero duration. What is the cost of that hedging? Basically it will drag expected returns down so they are similar to a short duration corporate bond fund. It has to do that otherwise the hedgies will be massively exploiting a free money trick. In other words, any expected gain should be arbitraged away.

If someone wants short duration investments, I would take a look at unhedged short duration investments first and then ask what you are expecting to get with a more complex product that takes long duration investments and hedges out the interest rate risk.

5 year total return (in dollars) of LQDH is 13%, 5 year return of the sister unhedged ETF LQDA is 20.7%.


*Edit, the fund is NOT currency hedged.

I have got the Vanguard Global Bond fund (hedged into sterling) in my ISA. Duration is about 7 years. The bonds are mostly low risk. This fund figures prominently in their LifeStrategy and Target Retirement funds. Vanguard research suggests that hedged global bonds are a good diversifier for equities.