Is it time to sell corporate bond funds?

C_Mababejive

We keep hearing media chatter about the bond market except that they generalise and neglect to mention that what they really mean are gilts and not necessarily corporate bonds.

Still i am getting slightly jittery.

I am currently invested in..

fixed

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/m-and-g-strategic-corporate-bond-class-x-accumulation-inclusive/key-features

My first contribution into this fund was in August 2012 at 91.10 pence.

The returns are not as dramatic as with non bond funds but then neither are they as volatile. There is just a slow but steady upward tick and realistically, why shouldnt that continue?

Big fat company needs a loan, they float bonds, institutions buy them. They get an annual divi and when the bond is due, they get all their money back. Whats not to like apart from fund charges?

Pincher

It's the transaction cost of getting in and out of the fund that would make me pause for thought. If it costs nothing to get out and go back in, I would scarper now.

C_Mababejive

fixed link..

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/m/m-and-g-strategic-corporate-bond-class-x-accumulation-inclusive/key-features

Linton

There may well be a good argument for not holding safe gilts as they dont seem to provide advantages over cash. However corporate bonds are less clear cut in my view. Corporate bonds cover a wide range of risk/returns, the very safest ones behaving similarly to gilts and high risk/high return junk bonds more like equities. If the economy tanks junk bond companies are more likely to go bust.

You have the risk that although bond values could well drop in the medium term future equities could crash in the meantime. An appropriate choice of corporate bonds should give extra diversification from the guaranteed income without excessive risk. So I will be keeping mine, buying more should the capital values drop significantly.

bowlhead99

C_Mababejive wrote: »

The returns are not as dramatic as with non bond funds but then neither are they as volatile. There is just a slow but steady upward tick and realistically, why shouldnt that continue?

Because you can't get ongoing high returns from fixed income without exposing yourself to the sort of risks that you get in equities.

The returns on that fund over the last 7 years (i.e. from this day in May 2008)have been 80%+, which is an annual compound return of about 8.75 to 9%. The 10-year annualised return is about 7% according to Trustnet. That approaches long term equity returns.

Some of this return is the actual interest on the loan that the "big fat company" is willing to pay, but some of it is the fact that the loan notes which pay a fixed coupon become more valuable as market interest rates fall, meaning people might be happy to pay (say) 120p today for a bond which is paying 6.25p a year now and pays back the 100p of capital in five-and-a-bit years time. Because the effective yield to maturity they will get for it is only 2% a year, but that's fine for them because it's similar to what they would get on five year issues of new bonds elsewhere on similarly risky companies.

That means you could have bought a bond back in the days of higher interest rates paying 6% on your 100p, collect the 6% return each year AND now sell out the bond which has magically increased in value to 120p. The effect from the decline of general market interest rates was very useful for holders of corporate and government bonds.

But now the yield to maturity of 5-10 year corporate bonds for companies like BT, Vodafone, SSE, GE, RBS, Tesco, LSE, Transco, English, Severn Trent, Scottish Power, EDF etc (to just reel of some names haphazardly from the fixedincomeinvestor website) is already down to 2-3.5%, from a headline coupon of 5-7%. The gain from the historic reduction in interest rates over the last 7 years is already in today's price. How much further are the interest rates going to fall over the NEXT 7 years to keep the current bond prices supported or to keep the steady return rates going, rather than have them fall back?

So, while companies are always going to need to borrow money, it can't be one way traffic and the fund values can't keep growing by more than the coupon (without some skilful work by the fund manager, who's not infallible) as we go forward into an environment where the interest rates go in the opposite direction?

The natural conclusion is that returns on corporate bond funds can easily go negative.

Big fat company needs a loan, they float bonds, institutions buy them. They get an annual divi and when the bond is due, they get all their money back. Whats not to like apart from fund charges?

The strategic bond funds don't buy at issue and hold to maturity. They often buy second-hand bonds on the market and will have to sell them whenever they find other opportunities, or when they need to get cash for the people who want to redeem out of their funds (either because those people are getting "jittery" or simply want the money for something else). As such the return from a bond fund does not have to reflect the return of a loan note held to maturity and there are plenty of opportunities to come unstuck.

gadgetmind

This will help you answer your question.

https://www.bondvigilantes.com/blog/2015/05/11/downside-bonds/

As long as your crystal ball is working well!

C_Mababejive

Well im no expert and i have read so many articles on what may or may not happen in the bond market. Having had a look at how the various buys in this fund have done in the few years i have held it, i have to say the gains have been reasonable although not stellar but then again, its isnt high risk stuff. I think i will keep my current holding for now and only add if the price nibbles down from its current position.