Dipping my toe into corporate bonds - Advice requ...

[VT82]

I'm running out of places to generate a decent return on my savings, and the outlook for me managing to divest some of it by moving up the property ladder is receding. I am therefore thinking it's time to look at using my S&S ISA allowance.

There is a retail bond that has caught my eye. It is the Alpha Plus 7 year 5.75% Secured Bonds. I am tempted because it is secured on property in London. Yes it is schools, so will count as being secured on commercial property, but for me, being secured at all means it compares favourably to any unsecured retail bond I have seen recently.

My only concern is that the proceeds are to be used to repay shareholder debt, and I can't work out from the accounts how much was paid in dividends last year to see if the coupons will be more or less than this, although the operating profit of £4m last year (on turnover of £58m) should provide a decent interest cover regardless.

I was only thinking of sticking about £2-3k in there, and getting the rest of my allowance into some bond fund and some equity fund by the year end, topping them up over next year also (although not UK as there's where my pension fund is still sitting by default). So as I say, just dipping my toes in. However, I had been planning on opening an S&S ISA through Cavendish, as it was recommended on here and my dad has managed to use it to open an ISA investing in an HSBC Tracker fund quite simply and cheaply. But the advert says the Alpha Plus bond is only available through Collins Stewart, iii, Peel hunt LLP, RM Capital Markets, Selftrade, Shore Capital or Smith and Williamson (or Barclays?). Does anyone know which of these I should use that would be cheapest, and wouldn't conflict with my other plans on what to do with my S&S ISA allowance this year and next (or make it more expensive)?

Thanks for your help!

[Jonbvn]

Seems high risk to me - far too small.

How about some corporate bond funds?

http://www.fixedincomeinvestor.co.uk/x/default.html

[Glen Clark]

another interesting link: http://www.telegraph.co.uk/finance/p...the-risks.html

[gadgetmind]

Originally Posted by VT82

There is a retail bond that has caught my eye. It is the Alpha Plus 7 year 5.75% Secured Bonds.

Have you read this?

http://www.fixedincomeinvestor.co.uk...y=2012&aid=867

Personally, I think you need to be diversifying whether you go for equities or bonds, which means either collective investments (funds or Investment Trusts) or 20+ different holdings with a good sector spread.

All bonds yields have dropped over recent months, and even riskier stuff like the preference shares I bought (LLPC, NWBD, RECP, etc.) has seen capital increases, so it's getting harder to find good returns without going up the risk scale.

Even stuff that I deemed too risky to touch like the Enterprise Inns 6.5% 2018 is heading up towards par!

[VT82]

Originally Posted by Jonbvn

Seems high risk to me - far too small.

How about some corporate bond funds?

I like the idea of knowing the return is guaranteed. And owning it directly would mean there are no management fees like with any fund (however small the fees are). I guess the liquidity of it would be an issue, but I think I can live with that for such a small investment.

Assuming I'm not talked out of it, does anyone know the answer to my question of what is the most reasonable route to investing in it?

[gadgetmind]

Of that list, Selftrade would seem the most likely, but I know that Hargreaves Lansdown are also fairly good regards retail bonds.

[Linton]

If you want an small investment (say < £20K) in bonds I would recommend that you buy a bond fund. In that way you are putting a small amount of money into a large number of different bonds and so will not be greatly affected should any one go bust.

To buy funds directly you can either subscribe to one of the few new ones made available to the general public or buy on the market. Some of the online brokers will let you do this - iii for example.

Very safe bonds are currently expensive as they provide a refuge from the current poor returns and volatility of equities.

[EdGasket]

Originally Posted by VT82

I like the idea of knowing the return is guaranteed. And owning it directly would mean there are no management fees like with any fund (however small the fees are). I guess the liquidity of it would be an issue, but I think I can live with that for such a small investment.

Assuming I'm not talked out of it, does anyone know the answer to my question of what is the most reasonable route to investing in it?

The 'distributors' are listed on the prospectus, why not ring one up and ask? After the 11th December you can buy in the market but then the spread and dealing costs will bite.

Authorised Distributors
Collins Stewart Wealth Management (UK)
www.collinsstewartwealth.com
Interactive Investor
www.iii.co.uk/investing/news-issues
Peel Hunt LLP
www.peelhunt.com
RM Capital Markets Ltd
www.rm-capital.co.uk
Selftrade
www.selftrade.co.uk/alpha
Shore Capital
www.shorecapital.co.uk
Smith & Williamson Securities
http://www.smith.williamson.co.uk/fi...ealing-service
Important Information
This Information Booklet is an advertisement

[Reaper]

Originally Posted by Jonbvn

How about some corporate bond funds?

Despite being a fan up until now I am starting to get a bit nervous about my fixed interest investments. I fear inflation may be on the way. My guess is not for at least a year but I think it will happen eventually and its a bit late in the day for a bond fund. If I was starting in bonds now I think I would go for short dated ones rather than a fund. Quite what I am going to do with all my preference shares I have not yet decided. It is tough to contemplate selling when they are paying me such a good income (7-13% after tax).

Originally Posted by gadgetmind

Even stuff that I deemed too risky to touch like the Enterprise Inns 6.5% 2018 is heading up towards par!

I went for that a few months back for the risky part of my portfolio, though I am reasonably optimistic it will turn out well given the high level of assets backing it up. I would have bought more but the buy price quickly went up beyond what I thought was reasonable.

[gadgetmind]

Originally Posted by Reaper

Quite what I am going to do with all my preference shares I have not yet decided. It is tough to contemplate selling when they are paying me such a good income (7-13% after tax).

I'm going to hold for the foreseeable as they won't be hit too hard because the coupons are just so good, plus I bought at a good price and everything is in my wife's name so no tax to pay.

However, undated instruments are more of a worry than dated as the price will be affected more by interest rates.

I would have bought more but the buy price quickly went up beyond what I thought was reasonable.

That's how I am with most of my holdings, equities and fixed interest. I hope the sales will be on again soon.

I looked again at the Enterprise Inns bond but eventually bought some RECP as the yield was about the same and the cover looked better.

[EdGasket]

Reaper, I think you are right about inflation and the likely impact on fixed-rate bonds. How do you think Index-Linked gilts would fair though? On the one hand they should rise with increasing inflation but on the other hand the low yield compared to presumably rising variable rates elsewhere could push them down. Any thoughts what these will do over the next few years?

[gadgetmind]

Originally Posted by EdGasket

Any thoughts what these will do over the next few years?

They are so over-bought that you're in effect preserving some of the purchasing power of the bulk of your money by accepting that you're going to lose the rest of it.

This of them as an "RPI minus a bit" investment.

[Reaper]

Originally Posted by gadgetmind

I looked again at the Enterprise Inns bond but eventually bought some RECP as the yield was about the same and the cover looked better.

Interesting, I hadn't looked at that one. The yield is approx 8% at the moment I take it?

I am going a bit off topic discussing riskier pref shares (note to everybody else only put a small proportion in the dodgy ones) but I did buy Doric Nimrod One (DNA). It means I own a bit of a passenger jet paying about 7.4% yield and potentially a 13% running yield to 2022 depending if they sell the aircraft at that time and if so if they get the hoped for price. They are still at roughly the price I paid. More info in this Money Week article . There are risks of course such as Emirates wanting to keep leasing it and not pranging it!

[Reaper]

Originally Posted by EdGasket

How do you think Index-Linked gilts would fair though?

I haven't looked recently but last time I did they were available at a terrible prices. Not tempted at all.

There are other inflation proof options. RPBX for example which we discussed here:
http://forums.moneysavingexpert.com/....php?t=3240714

It has risen in price recently (oh how I wish I had bought more when it had a big price dip!), and I still don't feel all that comfortable investing with RBS, but you might find it worth a look if you are considering something inflation proof.

P.S. Note it is currently on sale above the par price, so take into account there will be a capital loss at the end of the term if you hold it to maturity.

[gadgetmind]

Originally Posted by Reaper

Interesting, I hadn't looked at that one. The yield is approx 8% at the moment I take it?

Someone flagging it up on MF and also reckons the ordinaries (RECI) are worth a punt.

RECP is very interesting as it's a dated pref with five years to run. Not strictly allowed in an ISA but I bet they won't notice! It seems the Chairman has been buying both classes for himself and kids.

Those who do think inflation is coming might like to take a look at INVR. This is an undated Invested pref (rated BBB) that's BoE + 1% and is trading well below par. Current yield is just over 4% but it will heavily gear if/when interest rates go up.

The big downside is if Investec go south.

I may try and pick up some of these next year when a lump sum drops my way.

[EdGasket]

Originally Posted by gadgetmind

They are so over-bought that you're in effect preserving some of the purchasing power of the bulk of your money by accepting that you're going to lose the rest of it.

This of them as an "RPI minus a bit" investment.

...and yet they trend relentlessly up while paying a reasonable dividend/coupon. Just look at the graph for any IL stock.

[gadgetmind]

Yes, IL gilts have had a great run, but how low can yields go? They are already sub-inflationary, so you're relying on IL gilt prices going up further, which can only happen if yields drop even further.

IL gilts are dangerous *because* they have been over-bought not despite it.

[EdGasket]

All other things being equal, if inflation turns out to be higher than currently expected, would they not then continue to rise more?

[gadgetmind]

That depends on how much of their future earnings power people are prepared to lose.

Plot SLXX, INXG and IGLT over the last year to see why I'm still preferring corporate bonds.

[gadgetmind]

BTW, here are current stats for a selection of index linked gilts.

http://www.fixedincomeinvestor.co.uk...dexLinkedGilts

What do you notice about yields to redemption?