Santander corporate bonds

Whooper_2

Just had a chat with Santander at the local branch. The are advising their low risk corporate bonds (UK) giving about 12% pa.

I have £80k to invest, anyone have any experience or advice on this "low risk" ?

thanks

purch

It's not low risk, it is exceedingly high risk.

Whooper_2

Thanks for that Purch, I was slightly suspicious as I know very little of financial markets etc (Aviation background:A)

They do advertise these bonds on their leaflet as low risk, and the "lady" did say they only invest in top rated companies within the UK and showed me the flattering rising graph

Could you expand on the high risk side of things in laymans terms so I can explain it to my wife?

thanks

purch

The Fund will invest in/buy Bonds issued by various company's in the U.K.

The risk of these companies defaulting (not paying the money back, or the interest/coupon) is considered low, so in that respect calling the investment low(er) risk is ok.

However, the most important thing is the price paid for the Bonds.

Currently the price of Corporate Bonds overall is quite high, for a number of reasons, and is why the performance of the Fund over the past year or so is likely to look quite good.

If the price of these Bonds falls, then you will make a capital loss.

As part of a diversified investment portfolio, including a wide range of asset types then this kind of investment would make some sense.

But of this £80K is a large part of your investment portfolio then investing in just a single asset type is highly risky, and this particular asset type currently is risky too.

Whooper_2

Many thanks

chazzee

I would also add that if indeed this is a fund then the fees that are charged both upfront and ongoing need to be considered.

UK Bonds in general have had a good run over the last year, (albeit with a slight sell off when Q3 GDP showed upside surprise) - this has resulted in pushing yields much lower. So with the fact that inflation is running at over 3% (I doubt the fund is 100% inflation linked) and a fee probably in the region of 1.5 to 2%, you'd need to increase the risk of the portfolio either through credit (invest in riskier corporates) or longer maturity (increasing interest rate risk) to provide any real return.

Purch is right when it comes to a diversified portfolio, it's something you may want to consider, but should only form part of the broader asset allocation and you'd need to focus on the long-term aim/objective of what you want to do with your money.

dunstonh

Bond prices tend to be a bit wavy line as their key focus in income. At the moment, many bond classes are perceived to be at the upper end of that wavy line. Although some bond types are still thought to offer potential. As for risk, its difficult as any investment at the top of its "perceived" price range is considered higher risk. However, bonds in general dont have anywhere near the volatility of equities. So, from a volatility point of view and a regulatory point of view, they are considered lower risk (apart from the higher risk versions).

The thought of putting £80k into a single bank corp bond fund is a bad one. However, that is the sort of limitation you get with bank sales reps as most are not allowed to portfolio plan. I wouldnt rule out the fixed interest sector as part of a balanced portfolio but you need to be more selective than a year or two ago. Something you wont get from a bank.

You should never get your advice from a tied sales rep at a bank. Also, on that amount, you should go fee based and not commission. Fee based advice will be cheaper.

Aegis

If this is the fund in question, it has significantly underperformed its sector average. On top of that, it doesn't have anywhere near enough data to give a decent indication of long-term returns in the 12% region. In fact, if the sales rep implied in any way that this was likely to continue, then they were simply talking rubbish: with interest rates almost guaranteed to rise in the medium term, fixed interest funds are very likely to see fairly significant falls in their net asset values at some point.

There's a reason why the FSA requires all performance figures on marketing material to be accompanied by "past performance is no guarantee of future performance". This is even more true when there's so little past performance to compare the fund performance to the benchmark.

barak

Whooper - I agree with Aegis. It's extraordinary that anybody could recommend "low risk corporate bonds (UK) giving about 12% pa."

Is that really what the leaflet says? It sounds to me like improper advice. No such things exist.

As dunstonh implies - get some proper independent advice!

Whooper_2

Thanks guys for your advice, I really appreciate it, cheers :beer:

sabretoothtigger

I pay 1.61% for my bond fund. I really dont like paying that much, I'd rather have trackers. Not sure there is such a thing as bond trackers but it probably wouldnt be very good for reasons said above, rates are extremely likely to rise

I do think the UK in general might be slightly better off but in general we are tied to the USA so Im not that optimistic on rates staying low since they the bond market is massively political and a mess so far as I can see

If anything though I would favour higher rate bonds as the principal risk is the loss of the capital itself and if we have too much money changing hands, such as might cause inflation then I would hope there is far less or no excuse for non payment of debts. That is why we have low rates I think

I thought initially you meant santander bonds themselves which would be cheap right now because are spanish and there is a crisis of confidence in spain. So at least these arent at the top of the market and santander has been better then our uk banks with allocating risk and capital for each division I think.
I hold like 10% in a bond fund and for a single company risk I normally would do less, if 80k is your total that'd equate to 8k investment

Here is some Santander debt, its over 10% yield. Is this maybe what they were trying to sell you, theres no management fee if you bought it direct. They do encourage their own customers to buy their shares so its possible. The shares also yield like 8% I think

http://www.h-l.co.uk/shares/shares-search-results/s/santander-uk-plc--10-38-non-!!!-stlg-pre

And this one has a face yield of 8.625% and the current price makes that about 9.8% gross

http://www.h-l.co.uk/shares/shares-search-results/s/santander-uk-plc--8-58-non-!!!-stlg-pref


sorry mse has banned the links as swearwords, they are in this list:


http://search.h-l.co.uk/search?q=santander&btnG=Search+website&site=share_factsheets&x=0&y=0&client=hl_group&proxystylesheet=hl_group&sort=date%3AD%3AL%3Ad1&entqr=3&oe=UTF-8&ie=UTF-8&ud=1&filter=0&numgm=2

I hold their shares BNC which half or double in price whenever they feel like but the dividend has stayed good so far anyhow