This is especially true today. The bonds of many companies look good value to us at present. By purchasing their bonds, it is possible to receive annual interest payments currently as high as 5% from quality businesses like Vodafone and GlaxoSmithKline. When compared with the rates of interest offered for cash on deposit, it is easy to see why income-seeking investors are turning to the bond market in search of higher returns.
To assess the prospects for corporate bonds, it is common to compare them against UK government bonds (known as gilts). At present the signs are encouraging. In 2011 gilts increased in price as investors sought safe-haven assets. This drove their yield down – the ten-year gilt now yields around 2%. Corporate bonds on the other hand were largely overlooked, so prices and yields remained relatively stable.
The graph to the right shows the difference between the yield on gilts and the yield on high quality corporate bonds (known as the spread) increasing last year. At the time many commentators believed gilts looked expensive, and that prices could fall (increasing the yield). However, with the economic outlook deteriorating, and interest rates set to remain low, I believe gilt yields could remain at current levels for a while. By comparison, high-quality corporate bonds yielding 4 or 5% could look attractive for those seeking income. If extra demand drives prices higher, there is also the potential for modest capital growth.
Businesses with these traits are resilient to external change and capable of growing profits in an evolving economy. They ensure the odds are stacked in their favour by relentlessly exploiting and improving their competitive advantages. For this reason they tend to make excellent long-term investments. Start investing now. If you need cash to do it, look for the helpful loanstar title loans no matter what your credit score is. Once you have identified these companies stick with them excessive trading costs can eat into your overall returns.
Those seeking income
Separating the successful businesses of tomorrow from those in decline is difficult. Working out a fair price for the shares is also challenging. One option is to invest in a fund following this type of strategy. A prime example is the Lindsell Train Global Equity Fund. It is a concentrated portfolio, meaning each holding has a greater impact on performance, but this does increase risk.
We highlighted the fund at launch last year and early progress is encouraging. Whilst the market has fallen over the period since launch the fund has risen, and although past performance is no guide to the future we remain enthusiastic that this fund makes a great longterm equity holding.
Please note as this is an offshore fund it is not covered by the UK Financial Services Compensation Scheme.