Paragon IPO 9 year bond paying 6%

happyoleme

I am 58 and have a final salary pension.
My wife is 57 and has a SIPP worth a six figure sum.
I have made all the investment decisions about the running of the SIPP and investment. I do not have an IFA and i am happy to make my own decisions.
The SIPP is invested 100% in equities.
If suitable I can run the SIPP untouched for another 10 years.
We have our own home and money in some ISA's so we can stay invested for 10 more years.
I am aware that rising interest rates can have a negative impact on bonds so i have stayed invested in equities.
I am looking to start diversify the asset classes that the SIPP holds.
I have seen the Paragon IPO and read the prospectus.
Paragon is a FTSE 250 listed company with a market cap of £1.2 billion specialising in buy to let mortgages and other secured loans.. The bonds are to be rated -BBB.
I was thinking of investing 5% of the SIPP into this.
Has anyone got any views on the suitability of this.
I think that as it is a new issue it is priced at a rate that reflects the current market conditions and as such less likely to be hit by arise in the base rate.
On the other hand would I be better with fund invested in a range of bonds etc.
Having looked at Paragon I think they have a good growing business and are reasonably secure. After 9 years the bond will pay its purchase value and it will pay 6% PA throughout its life.
I do think why pay a bond holder 6% when average mortgages are currently less than 6%
On the other hand I could just buy its shares and have direct exposure to the property market that way.
I have also just bought some Blackrock Gold and General Mining units as a change of direction to give some start to diversification.
any comment and advice appreciated.

dunstonh

I am aware that rising interest rates can have a negative impact on bonds so i have stayed invested in equities.

You are also no doubt aware that a major bond crash tends to be no more than 10%. Whereas a major equity crash is closer to 40%. So, whilst you may have increased the upside, you have also increased the downside. And if you look at the gap since the last market crash you would have to think we are nearer to a stockmarket crash than we are the from the last one.

We have our own home and money in some ISA's so we can stay invested for 10 more years.

So, does that mean you intend to buy an annuity or full fund withdrawal at 58? (as drawdown would see you invested for much longer than that)

Has anyone got any views on the suitability of this.

its very high risk. 100% loss of capital potential and thats why its paying 6%. You say you have done your research. So, you must be aware that they recently lost a court case which could lead to them having to pay out millions in refunds to consumers. It is an area that FCA is currently looking at and we await the outcome. Is this what the capital raising is for? What is your view on how this potential event could impact on their business?

I have also just bought some Blackrock Gold and General Mining units as a change of direction to give some start to diversification.

Having a percent or two in that is fine but do remember that it is one of the highest risk conventional investment funds on the market. You are already 100% equity which is way above the average UK consumer risk profile. It is good to diversify but remember that diversifying into high risk assets doesnt reduce your risk. it changes the risk.

any comment and advice appreciated.

How would a 45% loss impact on your future plans?

Malthusian

BBB- is almost, though not quite, what they call "junk".

If you want to risk part of your pension fund in this company and would happily shrug off the total loss of that money, all power to you. I'm just not sure why, if you are confident enough to make that kind of decision, you're asking us for our opinion.

6%pa does not seem like a great deal to me, you can get a 6% yield from some high-yield bond funds. The yield of a bond fund is of course variable, as is the capital, but it will be diversified over dozens of bonds instead of just the one.

TheTracker

Bonds tend to perform more like equities the more low-grade high-yield you go (e.g. BBB/6%). If you're diversifying for bond-like performance then you need to stick with AA at least.

There is nothing wrong with having a portfolio of such lower grade bonds. I used to religiously buy most of whatever came up on the ORB. I stopped doing that and moved into much smaller, riskier, and higher return P2P loans to businesses.

You need to diversify within asset classes as well as between them - assigning 5% of your portfolio to a single bond is just as foolhardy as assigning 5% of it to a single equity. You can buy a fund or a tracker or spread across many such bonds as they come up.

So in my opinion the folly isn't putting money into the asset class but rather just throwing it at a single bond, and that if you are really looking to diversify you should be targeting other asset classes. I also wonder about the health of what you've got inside the equity bucket!

Thrugelmir

happyoleme wrote: »

I do think why pay a bond holder 6% when average mortgages are currently less than 6%

Banks leverage their balance sheets. At the time of the GFC in October 2008. Barclays had £72 of lending for £1 of capital. Even under BASLE 3 regulations which don't take effect under until 2019. Banks will still be able to leverage at around 33:1 if they wish.

happyoleme

Hi, Thanks for your replies.
Our plan is to retire on my final salary pension leaving the SIPP untouched. At some future time we will decide what to do with the SIPP.
It is a good point about the difference in size of equity v bond crashes. I am aware of this and that is why I am looking to diversify the investments with a potential 10 year period before touching the SIPP.
Depending on circumstances we may choose drawdown in the future.
I was not aware of the potential lawsuit and I was curious why the bond would pay 6% when mortgages are at much lower rates.
As you have both suggested and I have considered my self a diversified bond fund will be best.

Do you have any bond funds that you like?
Thanks.

happyoleme

hi,
The equity pot is
Woodford Equity Income 32%
Axa Framlington Biotech 18.7%
Woodford Patient Capital Trust 18.24%
SL Uk Equity Income Uncconstrained 11.64%
Franklin India Equity 5.37%
Blackrock Gold and General Mining 2%
Cash 12%

It is the Cash that I am looking to diversify first and then to look at the funds I hold.

dunstonh

happyoleme wrote: »

hi,
The equity pot is
Woodford Equity Income 32%
Axa Framlington Biotech 18.7%
Woodford Patient Capital Trust 18.24%
SL Uk Equity Income Uncconstrained 11.64%
Franklin India Equity 5.37%
Blackrock Gold and General Mining 2%
Cash 12%

It is the Cash that I am looking to diversify first and then to look at the funds I hold.

Wow. You like taking risks. That would pretty much come out about 10 out 10 on our risk scale (1 = cash and 10 equalling highest risk mainstream options). partly due to assets used and poor diversification. If you leave that as it is, you have one hell of a rollercoaster ride coming over the next 10 years.

happyoleme

Hi,
Quote,
Originally posted by Dunstonh
"Wow. You like taking risks. That would pretty much come out about 10 out 10 on our risk scale (1 = cash and 10 equalling highest risk mainstream options). partly due to assets used and poor diversification. If you leave that as it is, you have one hell of a rollercoaster ride coming over the next 10 years."

Yes you are right, it is a volatile mix with a strong bias to Biotech and Healthcare.
I believe they are growth areas and will continue to be interested in them. I do intend to start reducing my risk exposure over the next period of time.
I thought the Woodford Equity Income was a mainstream reliable choice that is not particularly volatile.
Is it poorly diversified because the funds are all too similar or just because of asset class.
The cash is from profit taking and will go into diversification into some less risky funds/ assets.

I think I prefer to invest in actively managed funds rather than trackers at this stage but may look at some Vanguard type equity/bond split funds.

Any comments are appreciated and i am always pleased to hear what others are doing and thinking.
Thanks.