WiseAlpha’s educational series: Teaching you everything you need to know about the bond market and more.
The persistently low interest rate environment has meant it has become very difficult to generate sufficient income from savings accounts, fixed-term deposits or even conventional retail bonds. In addition, rising inflation has also made it very difficult for individuals to grow their wealth in real terms.
The search for income or yield has led many to place an over-reliance on stocks for dividend income. However, it is worth remembering the aftermath of the financial crisis in which stocks took a big hit. This was a wake-up call for investors especially those nearing retirement who suddenly found that they had little time to repair capital losses and also had to contend with a doubtful dividend outlook.
Some investors have also turned to higher risk alternative investments such as small business or consumer credit peer to peer lending in recent years but these investments remain untested in an economic downturn.
But what if you could diversify your portfolio into another established asset class and generate annual income rates of between 3–11% from large, established corporates with the expectation of your capital back by a certain date?
Well, the institutional world (global banks, pension funds and specialist debt funds) have been doing this for years by investing in the Senior Secured and High Yield bond segments of the corporate bond market. These markets are almost exclusively institutional and haven’t been openly available to the mass private investor market because of the big ticket investment sizes and the relationship nature of the market, but this is changing and investors can now get exposure via WiseAlpha’s platform.
Here are the four reasons why every portfolio should contain bonds;
Regular income: Corporate bonds could provide a regular income stream through coupon (interest) payments with the expectation of the capital paid back at maturity. With coupons ranging from 4.0% — 10.5% or more bonds can provide a higher and fixed contractual rate versus dividends to equity holders. As with all investments your capital is at risk.Senior Security: Senior Secured corporate bonds have security over a company’s assets and rank ahead of equity holders meaning as a bondholder you incur less capital risk.
Comprehensive due diligence: Each bond is structured by a global investment bank with due diligence carried out by leading UK accounting and law firms
FTSE 350 size companies with solid fundamentals: Corporates who issue bonds tend to have more stable financial performance than other income based bonds issued to SMEs via mini-bonds, low yielding retail bonds on the London Orb or P2P lending. If something comes up, having investment exposure to a market leader or a FTSE 250 size company can provide a degree of comfort.
Investment diversification: Corporate bonds provide another high quality asset class to invest in, and have low correlation (particularly senior secured bonds) to equity and property, which are often subject to volatility within their respective markets.
Please remember that bonds are investments not savings or deposit protected products and your capital and interest is at risk.
Find out more about investing with WiseAlpha. All factual information true at the time of publishing.
As with all investments your capital is at risk.