Bonds are an important aspect of a well balanced investment portfolio- any serious money manager will tell you that. What financial advisers usually neglect to mention, however, is that the good old safe haven of US Treasury notes and other government gilts have well and truly lost their shine when it comes to preserving wealth and balancing out the risk. These days it is corporate bonds, the IOUs which private companies issue in order to finance expansions and enhance their short term cash flow positions, which are a more enticing investment proposition. Here are some of the reasons why corporate debt instruments should make up a significant chunk of your overall investment portfolio: 

 

 

Generally speaking, it is hard to find any economist or financial commentator that will argue against the notion that public debt in Europe, the US, Japan and many other economically powerful nations has now reached unsustainable levels. Whether you are for or against the measures being taken by most of the world’s central banks to stabilise the state issued bond markets, it is beyond doubt that this activity is effectively keeping a lid on the levels of return that investors can expect to receive.

 

Not only are the yields of government debt artificially low in most parts of the world, the risk element is higher than ever before. In times gone by, casting any serious doubt upon the ability of western 

governments to pay off their debts would be almost unthinkable. But as Tom Stevenson, an investment director at Fidelity Worldwide Investment, explains- “the changing risk landscape means that the bonds of companies such as Exxon Mobil, Johnson & Johnson and Microsoft are now deemed to be more secure than those of the country in which they are domiciled”.

 

Sure there are still big returns to be made from government bonds- anyone brave enough to acquire Greek or Cypriot debt instruments, for instance, could potentially make a fortune upon the assets’ maturity, though, given recent events, any investment in either of these economies should probably be followed up by a visit to the doctor! The fact remains though that major shifts in the risk to reward ratio of state debt is making government bonds generally less attractive than they used to be compared to corporate debt.

Bond holders often beat shareholders 

 

Many investors favour corporate bonds over corporate equities, and with good reason. One financier with a very strong appetite for corporate debt is Canadian business tycoon and prolific investor Kevin O’Leary. When asked about his preference for corporate bonds over equities and commodities, he stated that he is “a big believer that I will get the same returns out of corporate debt, whilst being paid anywhere from 4-7% yield on these bonds, as I will from owning the equities” He also points out that “a double B or a triple B bond is serviced before companies pay dividends”. 

 

Big companies in today’s world are well aware of the dangers that debt poses to investor confidence. They are more incentivised than ever before to pay off liabilities before even considering big dividend pay outs and expansions or acquisitions. This kind of deleveraging is happening all over the world right now- one example being UK based insurance giant Aviva PLC which has just announced a major dividend cut in 2013 in order to pay off a portion of the company’s debt.

 

 

One of the key ways to make money work for you is to put it into the places where it can create a steady stream of income that will compound over time, and perhaps most importantly, shield you from the evil demon that is inflation. When it comes to fixed rate investments such as bonds or even very basic high interest savings accounts, the truth of the matter is that unless the rate of return on your cash is higher than the rate of inflation you are letting your wealth gradually decay.

 

When it comes to government debt, the typical yield you could expect to get from US Treasuries or UK and European gilts these days is between 1-4% (depending on the duration to maturity and a variety of other factors which influence the rate of return at any given time). In fact, judging by the ECB’s actions in recent years, any valuation surges above this range for short-midterm bonds will be met with measures to bring yields plummeting back down. With inflation rates expected to stay somewhere between 1.5-3% in most European and North American nations, there is a very real chance that in nominal terms, bond yields will fail to return anything to investors.

 

Corporate bonds, particularly if you can stomach the prospect of putting your money into bonds that are rated below BBB (commonly known as ‘junk bonds’), can easily return 5-10% per year; even more in some cases. 

 

 

Bond based investing is no different to investing in stocks when it comes to risk appetite influencing the asset types that one is willing to obtain. There are plenty of blue chip companies who will pay a decent amount of interest to their bond holders and will certainly offer more peace of mind to their debtors than small cap firms. And of course there are the riskier, more speculative investments that pay a higher yield on their debt but at the same time pose a higher risk of defaulting on their obligations to bond holders.

 

Acquiring a strong corporate bond portfolio requires a significant amount of technical expertise. The good news for the average individual investor is that there are some superb, well managed bond funds out there which tend to focus on either specific types of bonds (i.e. low or high risk, long or short term maturity etc.), or aim for a solid spread with a good balance of risk and return in mind.

 

 

Some of the most exciting and historically best performing funds which focus primarily on North American and European corporate bonds include: 
 

Fidelity Inst UK Long Corporate Bond

M&G Corporate Bond 

Vanguard Long Term Corporate Bond Fund

Newton Long Corporate Bond Exempt 

Westcore Flexible Income

John Hancock Bond A

Henderson Long Dated Credit

Oppenheimer Core Bond A

Emerging market corporate debt  is only just starting to take off, but investors who are interested in this area may wish to look at:

Ashmore Emerging Markets Corporate Debt Fund

PIMCO Emerging Markets Corporate Bond Fund

Invesco Emerging Markets Corporate Debt Fund

 

 

 

 

Apple’s share price has seen a dramatic turnaround in the last year of trading. Having reached an all time high in its share price and setting all time records for being the world’s most valuable publically traded company, the firm’s stock has come crashing down in sensational fashion and at this time is trading between USD 380-400. Analysts fear that Apple’s dominance may be diminishing as big competitors swarm into the smart phone and tablet computer market.

 

 

After a seemingly unstoppable run up of global equities over the last few months, warning signs of a significant correction are starting to appear. While the Dow Jones has stayed more or less flat over the past month, the UK’s FTSE 100 index is trading slightly down after several bouts of multi-day aggregate losses. Many investors are starting to feel like the recent success of global stock markets may be unwarranted given the weak data coming from the US, China and Europe.

 

General Electric announces solid earnings figures, share price rally could come soon 

 

The US conglomerate announced a 16% profit rise in the first quarter of 2013. GE’s chairman and CEO, Jeff Immelt, stated that "in growth markets, equipment and service orders grew by 17%. We ended the quarter with our biggest backlog in history”. The firm’s recent sale of NBC Universal is also being seen as a key factor in bolstering the company’s revenue position. With GE’s share price still well down from historical highs, now could be the time to back this world leading blue chip company.

 

 

The price of Dell Inc’s shares fell to a two month low in late April after Blackstone Group LP withdrew their takeover bid. It now looks increasingly likely that the company’s founder, Michael Dell, in partnership with Silver Lake Partners Investment, will be able to go ahead with his bid to take the firm back into private ownership. Rival offers are still very much on the table, but the real question for shareholders is whether the struggling company can revive itself in the ever competitive PC market.

 

 

The long awaited game-changing merger between global mining and commodity giants Glencore and Xstrata moved a step closer to reality this month as Chinese authorities approved their proposal and agreed upon terms in which the newly formed company will supply copper to the nation for an eight year period. If and when the colossal conglomerate is put together, Chinese investors and officials will no doubt be very keen to procure favourable terms with the firm given the country’s soaring demand for commodities.

 

The prominent talking point that is the weakening of the yen has raged on throughout April- with further depreciation and more talk of devaluation oriented monetary measures to boost Japan’s struggling exports. The pound remains relatively weak following the plummet of its value earlier in the year. Dire economic data and high profile credit rating downgrades are adding to the pressure on forex investors to hedge against sterling. 

 

China’s rise to currency superpower status rages on as demand for physical yuan and assets which are denominated in RMB continues to soar. Against the US dollar the yuan has continued to appreciate to record highs in recent weeks and looks set to go even higher later in the year. Foreign residents in mainland China would be well advised to hold a good portion of their earnings and savings in the local currency. The performance of most major commodities has been weak thus far in 2013. Loyal fans of gold will have no doubt been devastated by the last few weeks of trading in which the commodity has been ditched on a mass scale. On 15 April the precious metal shed an astounding 9.3% of its value per ounce, and although it has gained back some ground from bargain seeking speculators since then, many analysts are now wondering if the great gold super-cycle has finally run its course. The price of crude oil has also been on a downward trend as the economic situation in China and the US continues to impact on demand. In terms of the industrial metals, commentators and speculators are divided on the prospect of further price falls in 2013. Now may well be a good time to be bullish long term as there are plenty of undervalued stocks in the commodity procurement and production sectors. 

By Josh Cooper