Corporate Bonds 2019

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Excellent can't lose your principal; however, you can see the value of your fund fall if yields rise and the bond market sells off," she says. "This has meant that at times when there were big swings in bonds prices and defaults, or fear of defaults on many bonds, it was a shock to see the value of invest- ments move so much." While private investors have been afforded exposure to company debt through the peer-to-peer market, this form of invest- ing has often been plagued by negative headlines, limited liquidity and concerns over its durability. In contrast, corporate bond issuances are assigned a rating based on their creditwor- thiness and offer an attractive investment opportunity that sits between cash and equities on the risk-return spectrum. Rezaah Ahmad, founder and chief exec- utive of digital bond platform WiseAlpha, says: "Corporate bonds are the best main- stream, risk-adjusted asset class; it is simply that they have been monopolised by insti- tutional investors, leaving them closed off to the everyday investor." In a bid to liberalise the market, WiseAl- pha has fractionalised the bonds of large companies into small units, allowing retail investors to invest in bond issuances from as little as £100. Mr Ahmad explains: "Many of the com- panies issuing bonds are the same FTSE From misunderstood to mainstream Corporate bonds, historically seen as complex financial instruments for large institutions, are about to have their moment. So what will it take for these securities to become more commonplace among retail investors? orporate bonds have, until now, largely flown under the radar of retail investors. With limited online trading and purchase sizes typically exceeding £100,000 a unit, they have his- torically been the preserve of large institu- tions and fund managers. However, in an environment of low interest rates and unappealingly low returns on cash, there is a growing appetite among retail inves- tors for an alternative to traditional savings products and often-volatile equity markets. Yet, for many, the question remains: what exactly is a corporate bond? Simply put, cor- porate bonds are debt issued by companies looking to raise money to fund or expand the business. The company sells the bond to investors in exchange for a fixed rate of inter- est, known as the coupon rate, and the prom- ise to repay the original investment at a fixed date in the future, known as maturity. Raising capital through private inves- tors has proved popular among companies that can otherwise face steep interest rates and various lending conditions attached to bank loans. According to the McKinsey Global Institute, almost 20 per cent of total global corporate debt is now in the form of bonds, nearly double that of 2007. But, despite global growth and efforts in the UK to set up a dedicated retail bond mar - ket, most notably the London ORB (Order book for Retail Bonds), corporate bonds have retained an air of mystery among pri- vate investors, in part due to the tradition- ally institutional nature of the market. Jeremy Spain, fixed income analyst at Charles Stanley, explains: "Either rightly or wrongly, some bonds tend to be looked at as being complex instruments and as such open to the possibility of a greater chance of mis-selling. This illusion has been given greater credence by the publicity surround - ing the selling of certain types of fixed income instruments to private investors." Alix Stewart, fund manager at Schrod- ers, echoes the sentiment that the dynamics of the bond market remain misunderstood. "There seems to be a misconception that without a default on an individual bond you Fiona Bond Journalist writing across business, finance and personal finance, she is the former commodities editor at Interactive Investor. Josie Cox Freelance business reporter, commentator and broadcaster, she worked at Reuters and The Wall Street Journal, and was business editor of The Independent. Marina Gerner Award-winning arts, philosophy and finance writer, contributing to The Economist's 1843, The Times Literary Supplement and Standpoint. Daniel Lanyon Financial journalist and managing editor of AltFi, specialising in investment, fintech, startups and venture capital, he has contributed to The Times, BBC and Reuters. Joe McGrath Financial journalist and editorial director of Rhotic Media, he has written for Bloomberg, Financial Times and Dow Jones, and was previously asset management editor at Financial News. Nicola Tavendale Freelance journalist, she writes for a range of financial publications, including FIA MarketVoice and FX AlgoNews. 350-listed household names that investors turn to for stock investments. Investors can benefit from transparent corporate report- ing and the ability to easily track a compa- ny's progress, while experiencing less vola- tility than equities. "Bonds also have to be repaid by maturity, providing investors with greater certainty over when they will receive their money in comparison to equities, whose valuations are open-ended. From this perspective, bonds offer less risk and more reward." Mr Spain agrees that regular interest pay- ments are an alluring prospect if the com- pany is deemed creditworthy. "The attraction of a fixed rate bond is that it offers a steady stream of income in the form of coupons," he says. "Many investors are happy to take the income produced by a bond and ignore the day-to-day volatility in price, as long as the issuer demonstrates decent debt sustainability." Broadly speaking, corporate bonds are divided into two risk categories: invest - ment grade, considered low default risk and paying a lower yield; and high yield, otherwise known as junk bonds, deemed altogether riskier, but offering higher returns as way of compensation. But there are a number of key considera- tions investors must make when assessing bonds, specifically the financial strength of the issuer, duration of the bond, interest rates and wider economic backdrop. As Mr Spain explains: "There are plenty of considerations for any potential inves- tor in the fixed-income markets; the most obvious are the prospects for global grow th and the length of the current busi- ness cycle. These concerns are closely tied into the inf lation outlook and any geopo- litical risks." Corporate bonds often offer higher yields than other fixed-income instruments, including government bonds, to offset the higher risk involved. If a corporate issuer runs into financial difficulties, they may default on their interest payments. In the worst-case scenario, the bondholder could lose all their original investment and, crucially, corporate bonds are not covered by the Financial Services Compensation Scheme. However, if a company defaults, bondholders are higher up the pecking order than shareholders when the proceeds of asset sales are shared. There is also the cardinal rule of bonds: if interest rates go up, bond prices are likely to go down. But as the saying goes, "He who dares wins". According to WiseAlpha, both investment-grade bonds and high-yield bonds have outperformed UK equities over the last 20 years both in terms of returns and price volatility. Ms Stewart at Schroders says: "Investors in corporate bonds should look at them as a diversifier from the other parts of their portfolio; they would do well as an alterna - tive to growth or value equities. "Longer duration funds can provide a good offset to portfolios that would be exposed to a recession as central banks have proven they would cut interest rates further and buy corporate bonds again if the need arose. This would keep corporate bond valuations well supported." Against a backdrop of economic and politi - cal uncertainty, and a concerted push to pro- vide investors with greater access and oppor- tunities, corporate bonds could well become the investment of choice going forward. Distributed in Published in association with CORPORATE BONDS Transforming the market D I Y I N V E S T O R S H U N T F O R Y I E L D R A I S I N G F U N D S Individuals can better control their investments and save on costly advisory fees Is this year's boom in corporate bond issuance likely to continue? From overseas expansion to M&A, there are a host of reasons why companies issues bonds 04 05 07 Fiona Bond C Contributors McKinsey 2018 1/5 2.5x $11.7trn of total global corporate debt is now in the form of bonds, nearly double that of 2007 United States Value ($trn) Nominal 2000 2003 2007 2010 2013 2017 Western Europe China Other advanced economies Other developing economies TOTAL increase in corporate bond issuance over the past decade global value of corporate bonds outstanding from non-financial companies Dealogic/McKinsey 2018 CHARTING THE RISE OF CORP OR ATE BONDS Global non-financial corporate bonds outstanding by region Bonds provide investors with greater certainty over when they will receive their money than equities I N D E P E N D E N T P U B L I C A T I O N B Y 1 7/ 1 1 / 2 0 1 9 # 0 6 3 0 R A C O N T E U R . N E T E D U C A T I O N Design Joanna Bird Sara Gelfgren Kellie Jerrard Harry Lewis-Irlam Celina Lucey Colm McDermott Samuele Motta Jack Woolrich Head of production Justyna O'Connell Head of design Tim Whitlock Managing editor Benjamin Chiou Associate editor Peter Archer Although this publication is funded through advertising and sponsorship, all editorial is without bias and sponsored features are clearly labelled. For an upcoming schedule, partnership inquiries or feedback, please call +44 (0)20 8616 7400 or e-mail info@raconteur.net. Raconteur is a leading publisher of special-interest content and research. Its pub- lications and articles cover a wide range of topics, including business, finance, sustainability, healthcare, lifestyle and technology. Raconteur special reports are published exclu- sively in The Times and The Sunday Times as well as online at raconteur.net. The information contained in this publication has been obtained from sources the Proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced with- out the prior consent of the Publisher. © Raconteur Media /corporate-bonds-2019 @raconteur /raconteur.net @raconteur_london raconteur.net Deputy editor Francesca Cassidy Digital content executive Taryn Brickner Guest editor Natalie Plowman 1.3 1.8 2.3 1.8 3.9 4.8 0.6 0.9 1.1 1.6 2.1 2.6 0.6 0.7 0.4 0.5 0.4 0.9 1.1 1.1 1.12 1.2 2 2.4 3.4 4.3 6.1 8.8 11.7 DISCLAIMER: Content in this publication should not be used as financial advice – please ensure you always seek the help of a qualified financial adviser. Gren Manuel Journalism consultant and digital managing editor of Raconteur, he was formerly European executive editor of The Wall Street Journal and editor of Financial News.

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