Seven reasons to re-think retail bonds
There seems to be a growing trend around retail or mini types of bonds with the Jockey Club recently launching one and advertising it everywhere, but I still have a few concerns over such products.
While they are termed retail bonds, the term covers both listed and unlisted bonds and I do not think unlisted investments are appropriate for the majority of retail investors.
Some of the key aspects of an investment that might be suitable for retail investors is the investment offers liquidity and secondary market where they can get transparent pricing to determine the value of their investment.
In addition few investors want to hold a corporate bond from launch to maturity. A secondary market gives investors the opportunity to value the bond.
While retail bonds could be included in SIPPs and ISAs, not all mini bonds will be eligible for inclusion. The ISA rules mean that the issuing company has to be listed on a stock exchange but not necessarily the bond.
A number of these bonds are not ISA-able so the yield is not as attractive as it is for investments inside an ISA. For example, the gross yield for Jupiter Strategic Bond yield is 5.4%. The yield on the Nuffield Bond is 6% for a basic-rate taxpayer but the net yield would be 4.8% and for a higher-rate taxpayer it would be 3.6% so in many instances it is not that attractive compared to the tax-free rate.
No capital growth
Because the bond is held from issue to maturity investors are only able to benefit from income return no capital growth. Using the Jupiter Strategic Bond fund mentioned above as an example, it returned 7.6% in capital growth over the last 12 months. Of course you can also loss money investing in bonds and the price can fall, but investors in these unlisted bonds may only get that shock when the bond matures.
Comparisons with cash
Much of the marketing literature I have seen on these types of bonds (although not on Nuffield Health’s bond) makes comparisons on the yield to cash. While I appreciate many savers are really struggling with low cash returns I think it is also important to highlight that bonds are riskier than cash
Why issue unlisted bonds
The main reason for doing so is to reduce costs; arguably the costs would only be passed onto the investor in terms of a lower yield but then the bond issued might not be successful if the yield is too low so in some instances the costs might have to be absorbed by the business or organisation issuing the bond.
Some bonds issue extra coupon through vouchers, points or other perks. These cost the company less to issue but are valued to the investor at retail price. I would rather have the cash and then I can decide whether or not to buy their goods or save that cash. I put a greater value on cash than on incentives to spend money.
The structure of the bond and indeed the company issuing the bond has a significant effect on the risks to the investor and where they rank if the company went bankrupt. Many of these bonds are issued by subsidiaries and are unsecured bonds so are at the bottom of the list for repayment should a company go into administration. These risks are not necessarily made clear enough to investors.
On the whole I am very uncomfortable with these unlisted retail or mini bonds. I think the London Stock Exchange has made significant progress with its Orb market in helping to provide essential liquidity to investors, making it easier to get a value for their investment and to be able to easily hold the bond inside SIPP and ISA wrappers.
I would urge investors to think carefully about any individual bond before they buy as you really need to appreciate the risks you are taking when lending your hard earned money to a company. When looking for alternatives to cash it is important to consider the risks, liquidity, the tax advantages and alternative investments that are available.
Adrian Lowcock is senior investment manager at Hargreaves Lansdown
This feature was written for our sister website Money Observer
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%.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
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.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.