With age comes wisdom, so they say, although that pretty much depends on your ability to remember stuff I guess. I can remember the credit bubble, the house price bubble and the technology bubble (No, I don't remember the Dutch Tulip bulb bubble, you cheeky boy), but being a little sad I remember a slightly smaller bubble too.
When the banks, in particular, starting having trouble selling equity based funds as the dotcom crash arrived they, along with other "herd mentality" advisers, latched onto a fund called the CGU Monthly Income fund. It was heavily pushed as the safe home for interest seeking investors, not only by the banks and advisers, but especially by non-regulated entities such as journalists, consumer groups, charities specialising in helping the elderly and so on. There were no dissenting voices to be heard.
By January 2000 it was paying an income in excess of 7%, the headline rate being the main selling point, and had about £1.4bn invested (at which point, interestingly, the fund manager retired 2 years early). In the following year the income dropped by about a quarter but more importantly the underlying capital value fell sharply. Funnily enough the threat to capital was in much smaller print than the headline income rate. Not much point having 6% income if the capital value falls by 17% is there ?
So here we are again in 2009, and corporate bonds are being heavily pushed as the safe home for interest seeking investors, not only by the banks and advisers, but by non-regulated entities such as journalists (with age also comes repetition).
A cynic might say it has all the hallmarks of the commercial property and commodity bubbles, particularly for those switching out of cash and into corporate bonds in search of higher returns. Corporate bonds are a very different asset class and there are still significant risks of capital destruction.
The other side of the coin is that there is potentially substantial value in the sector and the depression is definitely priced in to the value of corporate bonds, in theory most funds have made ample compensation for both default risk and the risk of a rating downgrade.
So, corporate bonds as a part of your overall portfolio ? Fine. As an alternative for your all your cash deposits ? No.
Todays lesson ? Don't follow the herd (Wildebeest still jump into that river full of crocodiles every year).
Savings and Investment Advice from IFAs