BLOG: Why mini-bonds could be bad for your financial health

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Following the launch of the Nuffield Health mini-bond, Adrian Lowcock of Hargreaves Lansdown explains why he is less than comfortable with these products.
BLOG: Why mini-bonds could be bad for your financial health

I have a bit of an issue with these retail or mini-bonds being launched. There seems to be a growing trend around these types of bonds with the Jockey Club Racecourse also recently launching one and advertising it all over. I thought I’d mention a few concerns we have over such products:-

– Retail bonds – Whilst they are termed retail bonds, the term covers both listed and unlisted bonds and I do not think unlisted investments are appropriate for the majority of retail investors. Some of the key aspects of an investment which might be suitable for retail investors is the investment offers liquidity and secondary market where they can get transparent pricing to determine the value of their investment. In addition few investors want to hold a corporate bond from launch to maturity. A secondary market gives investors the opportunity to value the bond.

– ISAs – Whilst retail bonds could be included in SIPPs and ISAs not all will be eligible for inclusion. The ISA rules mean that the issuing company has to be listed on a stock exchange but not necessarily the bond. A number of these bonds are not ISAable so the yield is not as attractive as it is for investments inside an ISA . e.g The gross yield for Jupiter Strategic Bond yield is 5.4%. The yield on the Nuffield Bond is 6% for a basic rate tax payer the net yield would be 4.8% and for a higher rate tax payer it would be 3.6% so in many instances it is not that attractive compared to the tax free rate.

– No capital growth – In addition because the bond is held from issue to maturity investors are only able to benefit from income return no capital growth. Using the Jupiter Strategic Bond fund mentioned above it returned 7.6% in capital growth over the last 12 months. Of course you can also lose money investing in bonds and the price can fall, but investors in these unlisted bonds may only get that shock when the bond matures.

– Comparisons with cash – Much of the marketing literature I have seen on these types of bonds (although not on Nuffield Health’s bond) makes comparisons on the yield to cash. Whilst I appreciate many savers are really struggling with low cash returns I think it is also important to highlight that bonds are riskier than cash

– Why issue unlisted bonds – The main reason for doing that is to reduce costs, arguably the costs would only be passed onto the investor in terms of a lower yield but then the bond issued might not be successful if the yield is too low so in some instances the costs might have to be absorbed by the business or organisation issuing the bond.

– Additional perks – Some bonds issue extra coupon through vouchers, points or other perks. These cost the company less to issue but are valued to the investor at retail price. I would rather have the cash and then I can decide whether or not to buy their goods or save that cash. I put a greater value on cash than on incentives to spend money.

– Structure – The structure of the bond and indeed the company issuing the bond has a significant effect on the risks to the investor and where they rank if the company went bankrupt. Many of these bonds are issued by subsidiaries and are unsecured bonds so are at the bottom of the list for repayment should a company go into administration. These risks are not necessarily made clear enough to investors.

On the whole I am very uncomfortable with these unlisted retail or mini bonds. I think the London Stock Exchange has made significant progress with its retail bond market in helping to provide essential liquidity to investors, making it easier to get a value for their investment and to be able to easily hold the bond inside SIPP and ISA wrappers.

I urge investors to think carefully about any individual bond before they buy as you really need to appreciate the risks you are taking when lending your hard earned money to a company. When looking for alternatives to cash it is important to consider the risks, liquidity, the tax advantages and alternative investments that are available.

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