Investor Views: "I’m Not Worried about the Bond Bubble"

Private investor David Kidd has made good returns from bonds in recent years — but is now looking at ways to reduce his inheritance tax bills

Emma Simon 17 May, 2017 | 1:20PM

Record low interest rates have caused problems for many people seeking an income from their savings. But retired investor David Kidd has managed to earn a decent yield on his portfolio by investing in bonds.

He says: “There have been some excellent opportunities in the bond market in the last 10 years. I’ve made more money from bonds than I have from my equity holdings.

“There have been lots of warnings about a bond bubble. But this doesn’t mean that there haven’t been some excellent investments around for those prepared to take a little more risk with their money.”

Kidd invests in a number of different fixed income investments. These include corporate bonds and government-issued gilts, as well as retail bonds, also called mini bonds – corporate loans offered directly to the individual investor market.

Mini Bonds, Maximum Returns?

In the wake of the financial crisis many banks scaled back their lending to individuals and small and medium sized companies. Firms looking to raise finance started to issue their own debt, directly to the retail market. With interest rates so low, it was hoped these would be attractive to investors who were fed up of getting minimal returns on their cash. Unlike corporate bonds however, many mini-bonds cannot be traded and must be bought at issuance and held until maturity. The smaller secondary market means that many investors may be faced with liquidity issues.

Kidd invested in a number of retail bond offerings, and has made good returns on most of them. He says: “Clearly these are higher risk than deposit accounts. Your money isn’t protected by the Financial Services Compensation Scheme. But in many cases it seemed to me you weren’t taking huge risks with your money, and were getting a far superior return.”

Fewer of these bonds have been issued in recent years, but Kidd says there are still some attractive deals out there. For example, he recently invested in a retail bond offered by the Charities Aid Foundation, paying 5%.

Kidd also invested in a similar bond, offered by Wasps Rugby Club, paying a 6.5% coupon. This price at which this bond traded at also rose after the initial offer period, so Kidd sold some of his holding, to cash in these gains. When the price of the bond fell again to below its issue price, Kidd says he topped up his holding, and again has seen some capital appreciation.

Corporate Bond Investments

Kidd has also invested in corporate bonds issued by more established companies, including one from the pub company Enterprise Inns (EIG). He says: “This was a bond paying 6.5% income that had just under 10 years to run. However, the issue price had fallen from £1 to 44p.

“At this price this gave a return of around 15% on my money. For this kind of return I was prepared to take a bit of risk with my money. If the company had gone under I would of course not have been paid.”

Stock Holdings Prove Less Successful

Aside from his bonds holdings he also invests in equities, although he says these haven’t always been as successful. For example he has invested in the Deltex Medical Group (DEMG). This medical devices company has seen its share price fall by around 32% over the past five years, according to Morningstar data.

Kidd says: “I bought into the company when shares were around 20p. Initially they went up to 30p, but have fallen sharply since then.” They are now priced at around 4p per share.

Kidd continued: “I still hold onto them. It doesn’t seem worth crystallising the loss at this point. It seems to me that they are making good product and they often make positive announcements about hospital trials and training staff to use their products. But this doesn’t seem to have translated into major orders.”

Rather than manage many of these smaller equity investments himself, Kidd is looking to outsource stock picking by investing in investment trusts instead.

He hopes this will also be less time-consuming. “My partner says I spend too long in front of the computer. I enjoy it, buy perhaps it is time to divest some of these holdings.”

Equity Investment Trusts

As well as his bonds and direct shareholdings, Kidd also has money in a number of investment trusts. These can be a useful diversification, he says, and also offer exposure to more global stocks. He also likes the fact that he can buy assets at a discount.

Currently he hold Witan (WTAN), which has a Silver Rating from Morningstar analysts. They describe Witan as “a very solid choice for investors seeking core global equity exposure”. The trust adopts a multi-manager approach which is run by its fund managers Andrew Bell and James Hart.

Kidd has more recently invested in a ready-made portfolio of AIM-listed stocks. This also has the advantage of protecting some of his assets from inheritance tax. Kidd was widowed 12 years ago and is now living with his new partner, but points out that as they are not married they don’t have the benefit of passing on assets IHT-free should either of them die.

Most of his assets are managed through a SIPP and ISA, both of which are with Selftrade.

As well as managing his own investments he also runs a number of portfolios for close family members. He says: “It’s a bit of a responsibility, as obviously I don’t want them to lose money. Many of these are a lot more conservatively managed than my own portfolios — as if I wasn’t running these portfolios they would probably simply sit in cash ISAs earning next to no money.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Deltex Medical Group PLC1.58 GBX0.00
EI Group PLC281.00 GBX0.00
Witan Ord211.00 GBX1.20

About Author

Emma Simon

Emma Simon  is a financial journalist, specialising in investment and consumer issues, writing for Morningstar.co.uk

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