New way through for bonds

Anthony Hilton
20 Nov 2009

It remains the automatic assumption of most savers in this country that they will ultimately get a better return from equities than from bonds, if they are willing to pay the price of greater volatility. Owning shares, even those of blue-chip companies, can be an unnerving experience.

Unfortunately while this is undoubtedly true over 100 years, and indeed 50, for the past 20 years it has not worked. Or to put that another way, the annualised total return on bonds has been better than on equities over the past 20 years. There have been periods of outperformance, when shares have streaked ahead but the stock market crash after the dotcom boom, and the second crash after the fall of Lehman has taken away most of the benefit of any such gains.

That accounts for shares being down on 10 years ago but it is more unnerving to learn that shares also lag bonds over 20 years. Buying shares for the long term is all very well but two decades seems long enough to most people. They are beginning to wonder how much longer they need to hold on to qualify as long term and suspect the economist John Maynard Keynes was right when he said that by the time the long run is with us we are all dead.

The relative safety of bonds together with the derisory rates of interest paid on savings accounts has meant that money has poured into specialist bond funds which hold out the promise of a decent return.

But any investor who does not want to pay fund managers' charges and seeks to buy a direct holding of individual corporate bonds hits a stumbling block which is unknown to investors on the Continent, where the market is much more retail friendly.

Here, bond issuance has been stitched up by the investment banks who find it quicker, simpler and more profitable to shut out retail investors and focus on their friends among institutional investors and hedge funds. They cannot be bothered with small investors so they have set the hurdle for the minimum level of investment at £50,000 or more which, as intended, deters almost everybody.

None too soon change is coming: the stock exchange announced this week that in the New Year it plans to launch a bond market for retail investors which should make it as cheap and easy for them to buy fixed-interest securities as it is to buy equities. It is not going to try to change the behaviour of investment banks — who can? — but it hopes to overcome the problem that most of the issues are wholesale sized by putting together an initial pool of what one might call “retail friendly” securities. Here it will be possible to buy in denominations of around £1000.

This should get the things started but clearly there is a hope that the presence of a visible retail element will encourage companies specifically to target them. It would be in their interest. Household names such as Tesco, Vodafone or John Lewis would find the marketing easy and they would probably be able to pay a lower rate of interest and still attract sufficient private investors to raise the money they need. Certainly that is the case in Italy, where Barclays and RBS, have successfully issued debt.

So why would it not work here? They will need to stand up to their advisers and insist and may not have the stomach for that, nor for the extra costs the bankers will seek to impose.

But there may also be another source of supply. Broking firms like Evolution, Panmure Gordon, Oriel and Numis, who cater for the mid-cap corporate market, are hoping to persuade some of these companies to try their luck with a bond issue as an alternative to increasingly scarce bank finance.

It is almost unknown in this country for any company below the FTSE 100 to raise funds through bonds, so it will not be an easy sell. But with the arrival of a retail bond market there is a natural community of interest. With companies needing to raise funds, retail investors willing to invest, and brokers willing to handle the issues, it should work.

ITV's Crosby deserves praise

Archie Norman's appointment to the board of ITV is such a coup it makes one wonder why no one thought of it earlier. Or perhaps they did but he took a lot of persuading.

Either way, it is a result for Sir James Crosby, the ITV non-executive director in charge of the appointment process, and it is to be hoped that those who were so quick to shower him with abuse and, even more absurdly, demand his resignation after the unsuccessful attempt to agree terms on the appointment of Tony Ball as chief executive, will now have the grace to congratulate him on a job well done.

There is a shortage of non-executive directors in this country, and the job is becoming ever more onerous.

The treatment which has been meted out to Sir James at several stages in the past few months is not going to encourage others to come forward.