Corporate bonds worth exploring
Corporate bonds – an asset class that features in many institutional portfolios – are also worth exploring by retail investors, judging by a recent appraisal from one of the country’s foremost advisers to high net worth individuals.
Barnard Jacobs Mellet Private Client Services (BJM PCS) highlights current advantages relative to listed property, a firm favourite with many investor-savers, while spotlighting the potential for even higher relative performance should inflation make a comeback in the next five years.
“Investing in corporate bonds has never been so attractive,” says Louis Bekker, head of multi-manager unit trusts at BJM PCS.
“Selected five-year corporate bonds currently yield just over 11% and trade at a wide premium over government bonds.”
Though quality corporate bonds now trade at a 2,85% premium to government bonds, direct bond exposure is not an option for the average retail investor. A more likely route ‘into bonds’ is through a unit trust bond fund or income fund.
For greater clarity on the level of bond exposure, says Bekker, the unit trust buyer simply checks the fund’s underlying components, paying special attention to the corporate bond weighting.
He notes: “Corporate bonds also stand out relative to listed property. The biggest stock in this Listed Property Index currently yields 8% and is expected, on average, to grow in above inflation over the next five years.”
A calculation by BJM PCS shows that the distribution growth of a property stock needs to grow by inflation or more over the next five years to match the yield on a corporate bond should the market require a yield of 8% after the five year period from the counter.
From 2009 to 2014, the projection is that R100 000 invested in the flagship listed property stock would grow to +/- R154 892, while R100 000 put into a good corporate bond over the same period would realise +/-R169 266. The difference between the two investments will depend on the yield the market requires after the five year investment period. Should the market require a 8% yield from this property counted after five years the total return between the two options will almost be the same. Should inflation increase and the yield after five year required by the market on property be above 8%, corporate bonds will outperform.
The problem with corporate bonds is that it can be difficult to trade them in when you want to – another reason for seeking exposure to this class through collective investment vehicles.
Lower volatility is the main compensation for illiquidity, says Bekker. Listed property counters prices tend to be much more volatile, indicating that the corporate bond offers a “more appealing” risk/return profile.
A move into corporate bonds could also be influenced by a retail investor’s view on the inflationary environment a few years down the track.
Bekker explains: “Should inflation be a problem after five years following unprecedented fiscal stimulation by governments, the market may require a higher yield from listed property stocks than currently envisaged. “In such a scenario, corporate bonds will be a better investment than listed property on a total-return basis.”
