Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Two ways to access the revival in corporate bonds
In, out and back in favour: what is going on with the corporate bond market? US corporate bonds have rallied since the presidential election in November thanks to higher risk appetite and higher expectations for corporate earnings.
Also in swinging in favour of the bond market are reduced expectations for interest rate hikes in both the US and UK. Higher rates can make bonds less attractive versus equities, so no action on rates is positive for bonds.
Corporate bonds are like ‘IOUs’. A company borrows money from investors in exchange for paying a fixed rate of interest and return of capital after a fixed term.
Microsoft (MSFT:NDQ), Apple (AAPL:NDQ) and AT&T (T:NYSE) are among the companies to have tapped debt markets so far in 2017 for significant amounts of cash.
Even UK-listed companies are part of this year’s corporate bond frenzy including miner Vedanta Resources (VED) which launched $1bn worth of bonds in January.
HOW TO ACCESS THE MARKET
Many of the best corporate bond opportunities are restricted to institutional investors such as pension funds and investment banks. Corporate bonds often require a minimum £100,000 investment which is too high for most retail investors.
One solution is to use the services of Wise Alpha, an online platform which launched in 2016. It invests in corporate bonds typically yielding 5% to 8% and effectively resells them to the general public in the UK in smaller portions for as little as £100 a time.
You can presently invest via its website in bonds from Enterprise Inns – whose shares now trade as EI Group (EIG) – as well as AA (AA.) and Virgin Media, among others. Wise Alpha says it hopes to expand its bond range in time.
Before you get carried away, there are downsides to this otherwise interesting proposition. Wise Alpha hasn’t got permission yet to offer an ISA, so you can’t hold bonds bought through its platform via a tax-efficient wrapper. You are therefore liable for income tax on the coupon payments. You also pay 1% a year in fees to Wise Alpha which further reduces your return.
Liquidity is another potential issue if you want to sell your bond before it matures. Wise Alpha says it has been able to buy back bonds from investors selling earlier as there have only been a handful of requests. What happens if there is a barrage of people wanting to exit at the same time? Wise Alpha makes no guarantee it will buy back the bonds ‘on demand’.
TAKING A DIFFERENT ROUTE
An alternative, more tax-efficient way of investing in corporate bonds is to consider a fund like Henderson Diversified Income (HDIV). It also provides exposure to secure loan assets.
You can hold the Henderson product in an ISA and you should be able to sell whenever you like as its shares are quoted on the London Stock Exchange. It yields 5.5% at present, provides more diversity than investing in single bonds at a time (as per Wise Alpha) and has a 1.1% ongoing charge (DC).