Tweet
Interest rates have already fallen to their lowest level in half a century and Bank of England governor Mervyn King has made it clear that he is prepared to cut further as recession bites. That may be good news for (some) borrowers, but it is bad news for savers. Rates for them have already fallen and look likely to decline further still.
Plunging share and bond markets have been deterring savers from considering alternatives. But the decline in interest rates means it may now be worth looking at bonds, in particular, on a longer-term view.
Darius McDermott, managing director of Chelsea Financial Services, says: 'Corporate bond funds are currently offering outstanding value when compared with gilts.' Their yields range from 5 per cent to as high as 15 per cent, depending on their composition and the amount of risk they are prepared to take.
The disparity between good and bad corporate bond managers has been especially marked this year: investment research group Moneyspider calculates that the five best funds - Standard Life AAA Income, M&G Corporate Bond, Rensburg Corporate Bond Trust, Prudential Corporate Bond and Morgan Stanley Corporate Bond - have lost an average of just over 3.5 per cent so far this year and gained between 8.4 per cent and 10.8 per cent over five years: not wonderful, but far better than most other assets.
But the five laggards - including formerly dependable funds such as Old Mutual Corporate Bond and New Star Sterling Bond - have lost an average of 21.5 per cent over a year and between 7.7 and 11.6 per cent over five years.
The difference in performance is mainly down to just one thing: banks. After the rescue of Bear Stearns in the spring, some fund managers were confident that all bank bonds were safe as they were effectively underwritten by governments. Subsequent events have shown how misguided that was: Lehman bond-holders are likely to lose the majority of their investments and, while the government did bail out Northern Rock's bond-holders, not all of Bradford & Bingley's got the same treatment.
That sparked a dramatic flight to quality, with government gilts and the top-rated AAA bonds soaring in price while riskier bonds plummeted. Funds holding a lot of the latter have suffered badly. John Hamilton, manager of Jupiter's corporate bond fund, likens it to the Tour de France cycle race. 'Some competitors look for discreet ways to add a small dash of something racy to boost performance. The higher the yield, the higher the risks attached. The risks may not be obvious, but they are there.'
The impact of banking failures has been exacerbated by the turmoil among hedge funds, as turbulent markets and the sudden difficulty of borrowing the huge sums that were key to getting their returns has forced them to cash in huge tranches of their portfolios. But the nervousness about the economic outlook and the duration of the credit crunch means buyers have been thin on the ground.
But some of the more cautious - and therefore better-performing - corporate bond fund managers think the tide could, at last, be turning. Ian Spreadbury, manager of the FIF Extra Income fund, thinks high-yield bonds now offer an 'opportunity for adventurous investors', while Richard Woolnough, bond fund manager at M&G, thinks the high yields on offer mean it is worth adding a little extra risk to the portfolio.
He points out that the extra yield on corporate bonds compared with government gilts - a key measure in bond markets - is as wide as it has been since the depths of the depression in 1932. While the outlook is as gloomy as it was then, investors are betting that the authorities will be better equipped to deal with stimulating the economy. While corporate collapses and bond defaults will rise sharply, Woolnough thinks the yields are now high enough to compensate for some of that risk.
Fidelity's Spreadbury agrees. He points out that just 0.7 per cent of European bond-issuers are not repaying their investors, compared with 3.3 per cent in the US, but that rate is expected to rise. But he adds that only a few high-yield bonds mature before 2010 and companies are generally well financed, so 'there may be a time lag before we see any meaningful rise in defaults'.
Darius McDermott recommends L&G Dynamic Bond and Henderson Strategic Bond, but M&G and Fidelity's range of funds have also been resilient during last year's turmoil.
In the long run, very little is as good as gold
Is gold a good hedge against economic uncertainty? Just a month ago, investors were queuing to buy gold bars as the price rose by more than a fifth in just two weeks. Since then, the economic news has become gloomier - jobs are being lost across all industries, the Bank of England is warning of a prolonged recession and even the Chinese authorities have been forced into offering a stimulus package - yet gold has lost all its gains and stands close to the year's low.
Angus McPhail, global oil and resources analyst at Alliance Trust, thinks that is largely because gold is priced in dollars and that currency has risen sharply. But he thinks gold is still attractive over the long term, partly because of its status as a 'safe haven' during times of recession, high inflation and falling interest rates - as we are likely to experience over the next two years. But he also points out that South Africa, the leading producer of gold, is experiencing political turmoil, which could hit output, while demand for gold for jewellery and investment from Asia is expected to remain strong.
Justin Urquhart Stewart, marketing director at Seven Investment Management, agrees that gold could have attractions in the longer term, because inflation is likely to be stoked up by the government bank bail-outs and stimulus packages. But he expects the price to remain weak over the next year to 18 months as inflation and interest rates fall. He thinks investors who have no exposure to gold may like to have some in their portfolio, but no more than 5 per cent.
While you can buy gold bars directly, you can also get exposure to gold by buying an exchange-traded fund - a share that tracks its price, such as those offered by ETF Securities. General commodity funds, such as Blackrock's Gold and General, will also have some exposure to gold as well as investing in a range of other commodities.
guardian.co.uk © Guardian News & Media Limited 2008 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
