Fixed Incoming

An increasingly well-trodden path in the investment press is the suggestion that corporate bonds (particularly investment grade) offer "historical value". This rests on the fact that the yield spread of investment grade bonds is wide enough to represent a good risk-adjusted option.

A few comments on that. First, the spread was much wider in Q4'08, as the credit crunch and financial sector implosion accelerated. So some of that potential return is gone. That doesn't mean that there isn't value there - but bear in mind another "catastrophe" would spike the yields back up again.

Second, you have to recognise that a large part of the investment grade fixed income market is based on debt issued by financials (banks, insurers etc). Granted, government is unlikely to let a major bank fail, but there's always the risk they could wipe out holders of junior bonds (they can certainly do it for shareholders!).

So how do you take a position in investment grade credit? The quickest route (and cheapest) is still an ETF. The issue with those is that they are based on indices that are, you guessed it, dominated by financials. If you're happy with some exposure to financials, why not though.

I'm very cautious on active managers, as they tend to be expensive and average bond pickers. Whether you go down the ETF or active fund route, please make sure you download the fact sheet of the fund, and look up the index information (it should show a sector breakdown of what the fund holds).

In these troubled times, it's really worth investing that extra half hour to read the ingredients of what you're actually buying. Happy bond hunting!