S Investors Seeking the Safety of Income, as Opposed to the Roller Coaster Ride of Pure Capital Growth Funds, Have Turned to Bond Funds in Droves in the Last Isa Season Finishing Last Week

Sunday Business (London, England), April 7, 2002 | Go to article overview

S Investors Seeking the Safety of Income, as Opposed to the Roller Coaster Ride of Pure Capital Growth Funds, Have Turned to Bond Funds in Droves in the Last Isa Season Finishing Last Week


sInvestors seeking the safety of income, as opposed to the roller coaster ride of pure capital growth funds, have turned to bond funds in droves in the last Isa season finishing last week. However, these funds could prove false security, depending on the type chosen.

The word "bond" denotes security and permanence. Technically, a bond is an IOU whereby the issuer usually agrees to pay back the principal at a fixed date, along with a stream of semi-annual interest payments along the way.

Many investors showing losses in their equity growth funds over the last two years are looking for the certainty offered by interest payments. Jason Hollands, of financial advisor Bestinvest, points out that equities are now expected to generate a total return of only 7%; the benefit of earning, say, 4% in dividends offers great comfort.

According to a straw poll of financial advisors, fund names such as Aberdeen Fixed Interest, Invesco Perpetual Monthly Income Plus, the M&G High Yield Corporate Bond fund and the Merrill Lynch High Income Bond fund have been very popular this year.

Clair Arber of the Investment Management Association (Ima), the fund industry trade group, agrees that "proportionally, more money has been going into bond funds this year". The Ima classifies UK bond funds in one of three categories: UK gilt, UK corporate bonds, and UK other bonds.

The bonds issued by the government, called gilts, will pay back interest and principal regardless of the state of the economy. The second level of bond is issued by well-regarded and well-financed companies. These are called investment grade. Typically, the interest rate paid by these companies is very similar to that offered by the government.

The idea is that the risk of these companies failing to pay back the fund on the right date is very remote. Thus the return offered by these kinds of bond may be slightly more than government bonds, but not much more. Generally speaking, these bonds show up in funds categorised by UK corporate bonds.

Stepping down the risk spectrum comes the UK other bond category. This is a mixed bag of funds which do not fall into either of the other two categories. These funds usually pay a higher yield and offer the potential for big gains or losses.

The highest-yielding fund is the u339m Invesco Perpetual Monthly Income Plus Fund, which currently pays out 11.2%. Because of this high headline yield, it has been one of the top-selling funds over the last Isa season. However, over the last year, the fund actually reported a 7.8% loss, including dividends payment, causing it to rank near the bottom of returns for similar funds.

In order to obtain the high yield, Paul Causer, joint head of fixed income at Invesco Perpetual, invests in high yield bonds as well as higher yielding equities. Causer says that the "high yield market has been quite awful" over the last year. He says that some "high profile" defaults, such as SwissAir have caused prices to fall substantially. …

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