Why poor bonds sell best

CORPORATE bond funds are being sold by banks ‘almost to the exclusion of anything else’, according to a leading financial adviser.

Funds which invest in corporate bonds — effectively fixed interest rate bonds issued by companies — are aimed at investors who don’t want the risk of share investments, but want more than they can get from savings accounts.

However, returns on corporate bond funds are so low — all but the most risky funds have returns of less than 5pc — that you could get as much on a good savings account without any risk. So why are corporate bond funds still selling?

Brian Dennehy, of Dennehy Weller, has examined the sales figures of corporate bond funds over the year to July, and compared the sales by independent financial advisers (IFAs) with tied agents — basically, salesmen who work for banks, building societies and insurance companies.

Over this period, 7.6pc of the funds sold by IFAs were corporate bond funds, while nearly 30pc of sales were in UK Equity Income funds. In comparison, 96.6 pc of the net sales made by tied agents over the same time were in corporate bond funds.

And while they sold corporate bond funds hand over fist, the banks’ customers cashed in their UK All Companies funds, which invest in the shares of UK businesses.

Mr Dennehy says: ‘Presented with these sort of figures in the past, the banks have tried to argue that their investors are different and very risk averse. If that is the case, were their investors originally mis- sold the large sums invested into the UK All Companies sector that they are now selling in volume?’

He adds: ‘ A cynic might conclude that tied sales sources have been making what, for them, is the easy sale — don’t adequately explain investment basics, tick the box on the form that says the investor wanted something low risk, show the investor (relatively recent) past performance for corporate bond funds versus stock market funds: sale made.’

Mr Dennehy’s research is backed up by reports that Halifax Corporate Bond fund remains the top- selling fund in the country — even though nearly all its sales will be made only through Halifax branches.

Indeed, in the second quarter of this year it is believed that sales of the fund topped £ 82 million — £ 50 million more than the next best selling fund ( also, coincidentally, a corporate bond fund: the Lloyds TSB- owned Scottish Widows fund).

Secret figures due out in the next few weeks for the third quarter of this year are expected to show that again, Halifax is the top- selling fund.

However, it would be wrong to suggest that corporate bond funds are bad investments. It’s just that the returns from all but the riskiest are a little better than you could get from a good savings account — which, of course, is risk-free. Mr Dennehy recommends three corporate bond funds: those offered by Jupiter, New Star and Invesco Perpetual. All three funds have ‘performed as well as we would have hoped’, says Mr Dennehy, and are currently yielding 3.05 pc, 3.49pc and 4.17pc respectively.

Overall, he says that although corporate bond funds are likely to have a ‘dull’ 12 months, ‘ over time’ they should beat deposit accounts.

c.beugge@dailymail.co.uk