Earlier in the month I started off this series looking at individual shares (part 1) followed by investment trusts (part 2). In this third and final part I will look at the use of fixed income investments (FI). These can take many forms - gilts, corporate bonds, retail bonds, permanent interest bearing shares (PIBS) and preference shares are some of the more popular.
There are still some attractive FI investments on offer, and as equity prices surge their yields decrease so, as and when an opportunity for rebalancing the overall portfolio arises, it may be worthwhile to have a closer look at FI.
Flavour of the month at the present time seems to be an almost weekly offering of new retail bonds. With the comparatively low rates from cash deposits - 3% if you tie up your cash for 5 years is currently the best on offer - the chance of a steady 5% or 6% return is certainly tempting. For me, as with equities, I would not be interested in chasing higher yields and compromising on quality.
Although I have tended to avoid OEICs for equities, the charges for some of the so called ‘clean class’ of FI funds are reasonably competitive - a common figure is around 0.75% - so they could well be worth a look for those preferring a managed approach.
Using FI for Income
Some years back when I was giving some thought to my income portfolio, I decided it might be a good idea to include some bonds and fixed income as part of the mix. This was largely due to the higher immediate yield on offer - at the time some yields were over 10% - combined with the desire to provide some diversity and also stability. At the time, the yields on gilts did not look particularly attractive (and still don’t) so I settled on a mixture of PIBS from Coventry BS and Nationwide BS, preference shares and corporate bonds.
Although the income does not rise to keep pace with inflation (which is the big attraction of equities), if you start off with a reasonably high yield on the FI part of your portfolio, it can take many years before the purchasing power is overtaken by the lower yielding (but rising) equity yield.
Criteria for Selection
The starting yield should be significantly greater than cash deposits - say 100% more as a rule of thumb. If I were starting today, I would therefore be looking at a starting yield over 5% or 6%. This is to compensate for the absence of a rising yield to keep pace with inflation.
The institution offering the FI security must be robust and have strong fundamentals. I therefore avoid the ‘junk’ end of the FI spectrum.
Diversify - a reasonable mix of PIBS, corporate and retail bonds, and preference shares.
Buy & Hold Strategy
For me, the holding of FI securities are a means to an end. They provide a fairly stable, predictable fixed income for a known period of time. They are currently set up to bridge the gap between where I was when I purchased a few years back, and leading up to state pension age. At that point or shortly before, I will review the FI portfolio.
Unlike with equities, it is not therefore a buy and hold for the long term - more like a buy for convenience for the medium term.