Evercore Pan Asset

In recent days sterling corporate bonds have had a little spurt in the markets. I have liked this asset class all year. It is a relief to discover some others now share my quiet passion.

Investment is partly a fashion industry. You may be gloriously right about what will happen next to your chosen investments. You may get the profits and dividend forecasts right for much loved shares. You may read the property market well. You won’t, however, be able to show a good profit on your portfolio unless others come in to buy your type of investment and drive the price higher.

Like all fashion, in investment markets there can be nothing as dated as last year’s top of the range number. You need to know what might become fashionable, and need to know when to sell it on and take your money. What long term investors are always hoping to find is the fashionable classic, the perfect investment that works well in all conditions, never too flashy, never so fashionable, but always comfortable and smart.

This year I think corporate bonds are that fashionable classic. There is little flashy about them. They do what it says on the label, and do it rather well. They pay you a regular income. If you bought a portfolio of high grade corporate bonds at the beginning of 2010, you would have locked in an income of around 6%. That compared well with the 2-3% available on share markets, and the 3-4% available on government bonds.  The yields were higher because the Credit Crunch had shaken people’s confidence.

Today some confidence is returning. Many large companies are now well into recovery. They are generating higher levels of cash flow and profit. Even the banks are improving fast. Most of the big ones now look as if they can raise the extra capital they need and replace the bonds and loans that fall due for repayment without too much difficulty. The gap in income between government bonds and corporate bonds still looks a bit wide for all but crisis conditions.

You must always ask yourself as an investor what could go wrong? Could high quality companies fail to pay the interest? That does not currently look likely as conditions are improving. Could interest rates generally go up? Yes they could, as they are very low by all standards. Yet most commentators think the authorities in the US, UK and EU are so stung by past events and  by the modest or fitful pace of recovery that they will keep them low for the foreseeable future. Even if they do not, a 5-6% yield on good corporate paper gives you some margin even if official short rates double or treble from their current 0.5%.

Could the sheer weight of new paper that companies especially banks may need to issue sandbag the market? It is one of the arguments used to justify the current apparently high yields. It would be surprising if it forced yields up from here unless some other cataclysm hit markets and drove rates up on everything else at the same time.

Nothing is completely snag proof. You could have bought corporate bonds at cheaper prices in the crisis, or even at the start of 2010. Yet I can’t help thinking they are at least this year’s fashionable classic, which might earn a longer-term place in your portfolio wardrobe.

As published in ‘Investment Week’