Corporate bonds during the credit crunch

 

Corporate bonds emerge as winners in market carnage

Corporate bonds - one of the most popular asset classes for older investors wanting income - have been experiencing something of a renaissance in fortunes in the credit crunch, reveals new data by investment data analyst Moneyspider.com.

While equities continue to take a battering, some bonds are now delivering attractive yields, but as the Moneyspider.com research shows, investors holding bonds with the likes of Old Mutual - which was top of the tree at the end of 2007 - should look carefully at their holdings.

"Old Mutual's corporate bond fund had been riding high, but our data shows that this £920m fund has been knocked sideways, dropping from an A to an E rating with Moneyspider.com," said the Moneyspider.com director Tony Ahearne. "A £7,000 investment in the fund is now worth just £6,216, following a 24 per cent drop in the fund's returns over the past 12 months."

"Also struggling are former star turns New Star and Gartmore whose corporate bond funds are down 23 and 20 per cent respectively over the past year. Both also attract the lowest E rating," he added.

But Ahearne pointed out that while the credit crunch volatility actually helped corporate bonds, as companies are more willing to borrow money from bond buyers rather than banks, banks are currently being ultra-cautious in their terms of lending.

"To encourage bondholders, companies are offering them more attractive returns, which in turn has seen the asset class returning to favour: bonds are currently the most popular sector for unit trust sales as investors shy away from the volatility of equity markets," he said.

"But while Standard Life, for example, holds the top performing corporate bond fund, it still only secures a B rating under the Moneyspider.com system."

Ahearne added that some bond funds, as well as offering more stability in today's difficult markets, are now delivering inflation and cash beating yields, as well as the potential for some capital growth.

"With the base rate now down to just three per cent savers are going to have to look under every stone to improve on returns from High Street and online savings accounts, and with some bond funds offering yields of up to 10 per cent this sector could quickly come back into vogue."

However, investors should not put all their eggs into this one basket, as the risk of default has certainly not gone away. It only needs one or two defaults by Bond Issuers for the published yield from a Bond Fund to be significantly reduced."

 

Tony Ahearne, Director, Moneyspider Limited.
Tony has been an Independent Financial Advisor for over 30 years. (The above article is based on the author’s understanding of the new rules and investors are advised to take their own professional advice.)"Many of our members now check their funds on a daily basis."
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