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.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.