Income-hungry charity investors are casting around for improved returns. Ben Bennett explains the opportunities and risks with corporate bonds.
Investors are currently faced with some important asset allocation decisions. Amidst volatile markets there has been a flight to quality with many investors seeking the safety of government bonds. However, with yields currently at historical lows they offer very little source of potential returns. At the other end of the spectrum, some investors are dipping their toes back into equity markets, hoping that the worst may have been seen. Those following this approach, however, are likely to contend with high volatility and uncertain dividend payments. But, the most popular choice at the start of 2009 has been the middle ground between the two: investing in corporate bonds. Figure 1 shows the respective yields available within different asset classes and highlights just how dramatic the shift in the relative value of corporate bonds has been during the latter part of 2008. One dilemma facing investors is the extent to which company shares can recover lost ground without an improvement in investment grade corporate bonds issued by the same companies. Risk-averse charity investors may take comfort from the attractive level of interest payments on bonds which rank ahead of uncertain dividend payments.