What are UK Corporate Bond Funds?
A corporate bond is an instrument of debt that is issued in the form of a loan in which the bondholder lends money to a company that is issuing the bond.
The company makes regular interest payments as promised and repays the principal at maturity.
A UK corporate bond fund is a type of investment fund that pools funds to buy a selection of bonds issued by companies based in the United Kingdom.
It is common for these bonds to be issued by large, well-established companies that provide fixed interest rates over a set time.
Investing in corporate bonds can provide investors with higher returns than government bonds.
This is because the government is unlikely to default, at least in developed countries, on its promises, whereas corporations are vulnerable to default due to several economic factors.
Investing in corporate bonds is one of the best ways for you to diversify your portfolio and potentially get higher returns than you would receive from savings accounts or government bonds.
It also gives you access to a wide variety of companies and industries to construct a bond portfolio.
A corporate bond is considered to be a lower-risk asset than a stock and share because the bond issuer is required to make regular interest payments and repay the principal upon maturity of the bond.
For example, if you buy a corporate bond for £1,000 with a maturity of 5 years, that pays 3% a year. You will receive £30 a year for the next five years and at maturity, you will get your £1,000 back.
Are UK Corporate Bond Funds a Good Investment?
Corporate bonds issued by UK corporations can be a good investment choice because they tend to offer a regular income stream in the form of interest payments.
Over time, there is also a possibility that the capital of the bond will increase if you purchase it at a discount.
However, to make the right decision, it is important to understand what the risks are, such as changes in interest rates, the bond fund credit quality, and economic conditions.
An increase in interest rates has a significant impact on the performance of corporate bonds, as rising interest rates cause bond prices to fall and investors’ returns will be affected.
In contrast, when interest rates fall, bond prices tend to rise, which in turn can result in higher returns for bondholders.
Investments in corporate bonds are mainly associated with credit risk which is one of the most significant risks. In other words, this refers to the possibility that when a bond reaches its maturity date, a company may not be able to return the principal or may default on its interest payments.
Furthermore, it is important to take into account the market risk associated with UK corporate bond funds as well. There is a risk that the value of the fund can fluctuate as a result of changes in the bond market, leading to a decrease or increase in the fund’s value.
For instance, following the announcement of the mini budget by the Chancellor, Kwasi Kwarteng the bond market saw a sell-off which led to the Bank of England stepping in to restore confidence in the market.
Since the beginning of the year 2022, a total of £300 billion in value has been wiped off the value of UK corporate bonds, and a total of £283.8 billion from UK government bonds (gilts).
This is the biggest drop in 20 years and has been caused primarily by the rises in the base rate of interest.
You should also examine the fund’s portfolio to find out which types of companies and industries it invests in as well as its bond credit quality.
In the past, bond funds were considered a less volatile investment and they were a great way to protect your downside risk during market uncertainty.
However, during the last few years, bond funds have not provided the same level of security as they did previously.
UK Corporate Bond Fund Performance
If you had invested £10,000 in iShares Corporate Bond Index Fund (UK) in March 2013 that would have grown to £12,744 by 8th February 2023.
That represents a cumulative growth rate of 27.44% over the last 10 years, which would be an annualised return of 2.45% over the same period.
In comparison, the FTSE 100 Index has generated a 6.28% annualised return over the same period.
Over the same period, Vanguard UK Gilts ETF generated an annualised return of just 0.68%.
Source: FE Analytics
Overall, the UK iShares Corporate Bond Index Fund outperformed the Vanguard UK Gilts ETF but underperformed the FTSE 100 index.
Equities offer the best returns over the long term which is why the FTSE 100 Index has outperformed corporate bonds and gilts.
If you’re looking for a way to diversify your portfolio of investments, you might consider investing in UK corporate bond funds. To invest wisely, it is important to make sure you are aware of the potential risks involved and to select a fund that aligns with your investment objectives and risk tolerance.
This blog is written by Awet Ghirmay. He is a Head of Investment Research at Minerva Money Management Limited.
The Fund is authorised in the United Kingdom and regulated by the Financial Conduct Authority (FCA) Firm Reference Number:754570.
Link:http://minervamoneymanagement.co.uk/news-and-views/
Risk warnings
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
