Where to invest in 2015: bonds

In retrospect, if 2013 was the party, 2014 was something more akin to a hangover for UK investors.

Indeed, as the Christmas decorations come down and the fuzzy heads from New Year's Eve clear, many Brits will be wondering how they can make their cash work better for them in 2015 than perhaps it has done in the previous 12 months.

To put it in context, while 2013 witnessed the UK's FTSE 100 index soar by 19%, by late-November last year, following some steep ups and downs, the UK's blue-chip index had limped ahead by just 3%.

But ultimately investing should never be considered in terms of a discrete 12-month period. After all, over three years, Britain's blue-chip index is up by a more than respectable 45% – far beyond what any savings account has offered.

Looking ahead into 2015, there will undoubtedly be opportunities but simultaneously there is no shortage of challenges.

The UK has a general election to get through, the eurozone is struggling with its own economic engine and geopolitical issues still engulf the Middle East as well as Eastern Europe in the form of the Russia/ Ukraine conflict, all of which have the potential to weigh on markets. In addition, there is the looming prospect of higher interest rates.

But sensible investing is about diversification and looking longer term. So we've asked the experts for their views on the future for bonds, as well as their suggestions for what you might consider putting in your stocks and shares Isa.


Bond investors are entering 2015 with more than a hint of trepidation. Bonds, or fixed-interest investments, are 'IOUs' usually issued by either corporations or governments looking to raise capital. Essentially, investors are lending money for a set period, during which time the bond issuer pays interest and when the bond reaches maturity, the loan should be repaid in full.

Bonds, especially those issued by the likes of the UK and US governments, are generally seen as one of the safest bets out there. The main risk with bond investing is that the issuer goes bust, and therefore defaults on the loan, which is deemed highly unlikely with the two aforementioned administrations.

But here's the rub: both governments, after holding interest rates at their historic lows for so long (in order to prop up their respective economies), are now set to push them back up. Nobody knows exactly when this will happen but the consensus is forecasting a hike before the end of the year, and this spells trouble for bond investors, given their sensitivity to interest rate rises.

After all, bonds pay a fixed level of interest to investors but, as rates rise, this fixed level becomes far less attractive and it devalues the investment, so the capital price falls and the yield rises. However, bonds come in a variety of guises – hence spreading risk across a bond fund is key.

Willis says: "Overall, our outlook for bond markets is negative for 2015, particularly interest-rate-sensitive areas of fixed interest markets. Within the US and to a lesser extent the UK, all eyes are firmly focused on when interest rates are set to rise."

On the plus side, it is has been widely flagged up by governments on both sides of the Atlantic that when rates rise they are likely to do so at a slow pace and are most likely to peak at a much lower level.

But Connolly believes bonds still have a role to play, given they are less risky than shares and provide that extra layer of diversification, while Lowcock highlights: "While interest rates remain low, the search for income will continue to provide support for bonds."

Bond fund tips

Given the present backdrop, investors need to be careful when it comes to investing bonds. On this basis, wealth managers recommend investors look at strategic bond funds, which can invest anywhere across the fixed-income universe.

Both Darius McDermott and Ben Willis tip the Jupiter Strategic Bond, up 30% over the past three years. Willis says: "The managers of these funds will aim to identify pockets of value across and within bond markets and avoid expensive areas and those most exposed to rate rises." Patrick Connolly takes a similar view, tipping the Kames Strategic Bond fund, which is 25% better over three years. He says: "We want to hold funds that can manage any downside risk".

A favoured pick for Adrian Lowcock is the Artemis Strategic Bond fund, up 31% over three years. "Its manager focuses on the wider economic picture such as interest rate movements and combines his outlook with analysis of corporate bonds to determine the funds position," he says.



More about

Your Comments

When discussing bonds we should really differentiate between (usually) low interest rate government bonds (gilts) and retail bonds isued by all sorts of commercial organisations. Retail bonds can be anything between 4/5% and 8/9% interest rates. It would take an awfully long time (and probably never) for general interest rates to get to that level. If you invest for the duration of the bond then the market fluctuations will have no effect; you get the high interest rate thoughout the life of the bond and your originl capital investment back at the end. The only trick is to choose the ones that won't go bust . . . but then that's true of whatever the situation!  Or have I got this wrong?