The Dangerous Lure of Mini-Bonds

Editor's Views: Why the FCA is right to ban mini-bonds for good, what explains ESG funds' performance this year and how Aim has matured after 25 years

Holly Black 19 June, 2020 | 10:59AM
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The appeal of mini-bonds is easy to see.

Firstly, they offer stellar rates of interest compared to anything you can get on the high street. Rates of 7, 8 or 9% are a no-brainer compared to the Cash Isa paying 0.1%.

Secondly, they offer investments in enticing, understandable propositions. Using your cash to fund eco-housing or renewable energy projects or to fund a burrito business seems more appealing and tangible than putting it in Government gilts used for who-knows-what.

And, as if you needed another reason, the bonds promise to give you your initial investment back after an agreed period.

Yet it is all of these attributes which have made mini-bonds so dangerous. A survey of investors by the Financial Conduct Authority found that even with all of the “this is a high-risk investment and you could lose all your money” warnings in place, most people still felt mini-bonds were a safer bet than the stock market. 

Investors, of course, have a responsibility to do their research before handing over their money. But when you’re whacking £5,000 into something that nice man off the telly recommends, sometimes due diligence goes out the window.

The FCA is absolutely right to ban the sale of these products to retail investors. The potential harm outweighs any prospective benefits. Some people might gripe about heavy-handed regulation or moan that there are few viable income investments left to Joe Public. But if that means we avoid another LC&F situation, where unwitting investors were left out of pocket to the tune of £234 million, that’s fine by me.

Why ESG Funds Have Been Resilient

One of the arguments thrown at sustainable investing by sceptics in recent years is that funds with an ESG-focus (that is, those that invest with environment, social and governance factors in mind) have never been tested in a down market. “These funds have done well, sure”, they would say, “But we’ve been in a bull run for 10 years. So has everything.”

So, we’ve been watching eagle-eyed to see how sustainable funds have held up in the Covid-19 induced volatility seen across global stock markets in recent months.

They have proved resilient. And, what’s more, Morningstar research this week revealed that many of these sustainable funds have outperformed their non-sustainable peers over 10 years. Vindication for the ESG proponents at last!

But before you bust out the vuvuzela and the party poppers, I feel obliged to play devil’s advocate. We should, after all, always look under the bonnet of our investments. And I think something to consider in all these is why these funds have held up so well in 2020.

Is it their ESG-ness that has led to strong performance, or have other factors helped their cause? Like, for example, the collapse in the oil price which has hurt many of the commodities companies that ESG funds, by their nature, will not own. Or the rise and rise of the tech giants in this period of lockdown, which tend to score well on low-carbon and governance factors, and so feature frequently in ESG portfolios.

Or are these things one and the same? Investing in tech stocks doesn’t make you a tech fund, necessarily, if you’re choosing the stocks for their strong environmental or governance credentials. And does it really matter whether you avoided oil giants because they are automatically screened out of your strategy or because you made a bet the oil price would plunge?

This may not be, in the end, the proof that ESG funds outperform - it may be the proof that ESG funds aren't so different from the mainstream as you might have thought. 

Is Aim Ready to Grow Up?

Today marks 25 years since the launch of the Alternative Investment Market - the latest poor soul to have to have to celebrate a milestone in lockdown. 

The junior stock market has certainly been through its fair share of teenage angst, earning itself a reputation for fraternising with cowboys and ne'er do wells. But now with a quarter century of experience under its belt, perhaps Aim has matured. If it were a person this is the point it would start paying into a pension and staying in on Friday nights, and switching from alcopops to a nice bottle of red. 

Yes, the very nature of Aim does appear to have come a long way from those heady dotcom boom days when high profile collapses earned its less-than-stellar reputation. And, as I discussed with Gresham House's Ken Wotton this week, in a world of disruptors and entrepreneurial businesses, now could be the moment for Aim to shine. 

Aim may not be on every investor's radar but it's full of exciting growth stories and interesting businesses which could be future household names. It doesn't mean every stock on this market is investable or that there won't be more collapses, but the same could be said of any stock market (Carillion, Thomas Cook, anyone?) And we shouldn't keep judging something by the mistakes of its youth. 


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.

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Holly Black  is Senior Editor,


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