Corporate Bonds - Good investment or go to equity?

bugbyte_2

Hello, I'm jumping out of cash Isas into Stocks and Shares. I've got a small sum (£2000) in which to drop into a fund - Question is - which one? Corporate bonds have traditionally been 'safe' but are they overheated? Are defensive shares now overheated as well?

My current portfolio (minus cash isas) is 100% equity trackers - equal weightings America, UK and Pacific (ex Japan). If I'm light on anything, its defensive shares and small cap.

I would grade my risk aversion at medium - Don't mind loosing 20% if I can make 20%.

Money would be left alone for at least 3 years, possibly up to 9 years.

I have earmarked 3 possibles for the £2000 -

M&G Strategic Corporate Bond A, Very predictable No significant drops even in 2008, but appears overvalued.

Baillie Gifford Corporate Bond A, More volatile, but not as overvalued?

And a wild card, just because of its high performance with largely defensive share and capacity to move sectors when needed:

Neptune UK Mid Cap A.


Any thoughts or anything better?

Thanks, Bugbyte.

Reaper

I expect you will get varying opinions, but mine is to not to put new money into bond funds at this point, and I have been wondering about cutting back on what little I have. However I would still buy individual, short dated bonds if they are attractive enough.

Shaolin_Monkey

(Personal opinion) The trouble with a lot of investment grade corporate bonds at the moment is that they are yielding almost as little as government bonds. The price of the bonds have been pushed up so high, there's only so far they can go. Total returns over the last few years in corporate bond funds have been excellent, but I don't think those returns should be considered 'normal' and doubt they will be repeated in the next few years.

I recently sold out of M&G Strategic Corporate Bond which I'd held since 2009, at a nice profit, because of the above. The Baillie Gifford fund is in the Strategic Bond sector, which gives it more flexibility to move up or down the quality scale. You might also have a look at M&G Optimal Income run by the same manager as the SCB fund but with a more flexible mandate. Optimal Income however is attracting a lot of inflows, so whether it's size will work against it is perhaps a question. I replaced the M&G SCB fund with Jupiter Strategic Bond and Invesco Perpetual Monthly Income Plus for the time being. The latter holds a fair amount of equities as well as higher yielding bonds, and so is a bit more volatile. I'm considering adding an index linked bond fund as I suspect inflation might pick up in the UK, with the tumbling currency etc..

The Neptune fund is obviously a top performer in recent years, but a completely different animal to a corporate bond fund. The holdings don't seem to be listed on the usual sites or it's factsheet, so it's quite difficult to work out how defensive it is, but for the moment it's doing very nicely. Some 'defensive' equity funds might include something like Newton Global Higher Income, and I also quite like Fundsmith Equity, although it's holdings are very concentrated which could cause volatility at times.

Linton

Your timescale of 3-9 years is very awkward. If it could be as little as 3-5 years then I suggest you keep the money in cash, perhaps as a 3 year fixed term deposit. This timescale would be high risk for any equity investment and a worry for bond investments given their current high prices of low risk bonds and the volatility of high risk bonds. The riskier the bond, the more it behaves like equity.

An option would be to split your money into short term (< 5 year) and long term tranches. Put the short term into cash and use the stability that provides to justify higher risk investing for the long term money.

I wouldnt see the Neptune fund as defensive! Mid cap and Small Cap funds can hold many of the same shares. The graph looks good for the Neptune fund because it was launched shortly after the 2008 crash. Midcap funds typically fell by as much or more than the FTSE100 in the crash.

maryleerk06

I have a couple of corporate bonds in my portfolio that aren't doing too well at the moment so I have stopped topping them up until there is a bit more activity. I do think having other options in your portfolio like the Neptune fund is a good idea.

UK smaller companies funds performed really well last year! Wish I had invested there on reflection...not sure how they will do this year though.

Ark_Welder

What is the motive for looking to diversify away from the existing trackers and cash ISAs? What is a new fund holding designed to achieve? The answers to those might determine whether going into a bond fund now (or any other type of fund) makes sense - and answers might determine the type of (bond) fund to consider.

The yields on bonds might still be around their lowest-ever levels (a.k.a 'prices are high'), but they could stay at these levels for a while yet - how long can only be guessed at. A further question might be to ask what holding a bond fund instead of cash provides.

Something else that might be considered is that in just over 3 weeks' time a new tax year begins: that might bring a new issue of index-linked certificates at some point.

sabretoothtigger

Corporate bonds have traditionally been 'safe' but are they overheated? Are defensive shares now overheated as well?

Im not sure overheated is the right term but the problem is the currency. You are asking for a cheque to be sent to you in five years, the problem is not that it will bounce but that the cheque will buy less then it does now.

Is the interest worthwhile recompense, the odds are against this being true. Ideally you want risks to be overrated not underrated, due to what I mention its the latter

Share earnings can adjust as prices do, annually there may be upset but they generally track upwards so long as the company can adjust to new demands the shares will too.
Bonds are fixed in their views, its a one shot deal. In times of great change I think shares can be at least equal in risk and returns ie. dont rank shares as anymore risky, bonds are risky too now

Ark_Welder

sabretoothtigger wrote: »

...the problem is not that it will bounce but that the cheque will buy less then it does now.

A problem that can be addressed by holding inflation-linked bonds.

sabretoothtigger wrote: »

Bonds are fixed in their views,

Floating rate bonds are not fixed, the interest payments change when interest rates change.


Bonds are not all of the same type.

jimjames

maryleerk06 wrote: »

I have a couple of corporate bonds in my portfolio that aren't doing too well at the moment so I have stopped topping them up until there is a bit more activity. I do think having other options in your portfolio like the Neptune fund is a good idea.
.

When you say more activity, what do you mean? Price going up? If that is the case then it would seem to be the opposite of what you would expect. If something is cheap then that is the time to buy rather than when it has already risen.

A mix of funds in the portfolio is definitely a good idea though.