Just like with shares, when you invest in corporate bonds you invest in companies – by buying their bonds on a stock market. Corporate bonds are basically IOUs issued by companies looking to raise finance from investors. In return they pay out a steady stream of interest. You can leave the interest to grow or have it paid out to you as income every six months.
One big plus with bonds is that they don’t go through the roller-coaster ride share prices often do. Also the regular interest payments to bondholders are guaranteed, whereas dividend payments to shareholders are not. And should a company ever get into trouble, bondholders are paid out before shareholders in the pecking order.
A gilt works in much the same way except you’re investing in the Government rather than a company, which makes them even more secure.
The comparative stability of fixed interest investments like bonds and gilts makes them an excellent way of reducing your investment risk and providing a high and predictable return on your savings. They traditionally give much better returns than a bank or building society deposit account, and are less volatile than shares, as the graph below illustrates.
Source: Morningstar Workstation. £1,000 lump sum invested, buying to selling unit prices, basic rate tax with income reinvested, 03.10.95 to 01.07.08. 'Stock market shares' is the FT-SE All-Share Index. 'Bonds' is the Citi Eurosterling Bonds Index (AA- or better) which shows the performance of bonds with a security rating of AA- and above. 'High street savings account' is the UK Savings rate 2500+, based on the average rate paid by the top 20 building societies.
Unlike some companies, at Virgin Money we only invest in the highest rated bonds with top UK and European companies, plus a wide range of gilts which we benchmark against the FT-A British Government 5-15 year stock index. This strikes the right balance between security and return. When investments fall below the high benchmarks we set, they’re replaced.
Some fund managers may sail close to the wind by investing in higher-risk bonds (nicknamed ‘junk bonds’) which pay inflated levels of interest to make them seem more attractive to investors. Don’t be fooled. Funds offering apparently exceptional returns will by definition be taking more chances with your money. If the companies they invest in go bust, their bonds could be worthless.
Phillip Warland, former Director General of the Association of Unit Trusts and Investment Funds, had this advice for the wary investor, which remains as true today as ever:
"If you are moving out of a deposit account for the first time, then I would certainly recommend that you get hold of the safest bond fund that you can, even if the interest rate is not the highest."
Here's a full listing of the corporate bonds we currently invest in.
Customers growing their savings in our bond and gilt fund since 3 October 1995 have enjoyed an average return of 4.66% a year, turning a £5,000 investment into £8,934.12
Source: Morningstar Workstation, 03.10.95 - 01.07.08, buying to selling unit prices, basic rate tax with income reinvested.
| This table shows the annual return in the last five years | ||||
|---|---|---|---|---|
01/07/2003 to 01/07/2004 | 01/07/2004 to 01/07/2005 | 01/07/2005 to 03/07/2006 | 03/07/2006 to 02/07/2007 | 02/07/2007 to 01/07/2008 |
-3.3% | 10% | -1.4% | -2.4% | 1.1% |
Source: Morningstar Workstation, year on year 01.07.03 - 01.07.08, buying to selling unit prices, basic rate tax with income reinvested.
Bonds and gilts are different to saving in a risk-free deposit account. Their value and the interest they pay out can go down as well as up an there are no guarantees you’ll get back the full amount you invest. To maximise your chances of a good return you should be looking to invest for several years. As always, past performance isn’t a guide to the future.
