15th Oct

Royal Mail Frenzy Highlights Appetite for Income Investing

More than 700,000 private investors applied for shares in the recent sell-off of Royal Mail which according to Ian Gorham, chief executive of Hargreaves Lansdown, highlights the ‘real appetite for private share ownership and investing’ in Britain. 

Amid recriminations that Royal Mail had been undervalued by anything up to £1 billion, the rush for a slice of the privatised business resulted in the biggest ever sell off in the UK. 

However, Mr Bond contends that rather than signifying a renewed sense of economic optimism and an increased appetite for the stakeholder economy, in truth the level of interest reflects the desperation that many savers and investors feel after years of dismal returns from banks and building societies. 

With allocations scaled back, the opening day paper profit of almost £280 based upon a minimum subscription of £750 will doubtless come as small comfort to the long term investors that had been lured by the promise of a 6% p.a. yield. 

Balanced Portfolio

Retail Bond Expert has championed the use of retail bonds in a balanced portfolio, but has been left to commentate upon the perfect storm of improved availability of corporate funding, higher gilt yields and strong equity markets that has resulted in low levels of issuance during 2013. 

The scarcity of new issues contributed to the unprecedented demand for housing association A2Dominion’s recent retail bond issue which, at 4.75%, wasn’t the most attractive purely in terms of coupon, but did come with the additional attraction of a Fitch rating. 

Subject to meticulous due diligence, Bryn Jones, Fixed Income Investment Director at Rathbones Investment Management, is a strong supporter of this new asset class, but he highlights the limited supply of these products on the market, ‘making it relatively difficult to build up a diverse holding; investors should look far and wide for a supply of these products'.     

Those seeking to build a balanced investment portfolio should take a long-term view and recognise that with increasing returns comes increased risk and potential volatility. So if you are disappointed by your allocation in Royal Mail and frustrated by the lack of retail bond issues, where might you seek income?   

It is generally accepted that a balanced portfolio should spread exposure across sectors such as pharmaceuticals, utilities, energy, mining, retail and insurance; some may look no further than the FTSE 100 where several companies, such as Royal Dutch Shell, Glaxo, National Grid, and Vodafone, pay dividends of around 5% every year. 

Diversification of Sectors & Asset Types

In addition to sectors, diversification should be extended to asset types as well to avoid over-dependence upon, for example, equities or fixed income. 

Indicatively, a medium risk investor with a long-term investment timeframe might consider an asset allocation of 5% cash, 25% bonds, 50% stocks and shares, and 20% in other assets. 

Those seeking to establish an investment portfolio should first set out their financial objectives and then conduct some soul-searching to establish their true appetite for risk. 

Establishing these twin foundations will suggest a mix of investments that represent an acceptable combination of security and performance; many model portfolios and calculators can be found online for those prepared to invest the time and confident enough to take personal control of their financial affairs. 

Taking personal control or seeking advice?

Thereafter, ‘all’ that is required is to choose which specific shares, funds and bonds to buy, and perhaps complete the picture with some more esoteric investments such as commodities or emerging markets exposure. 

Those less comfortable with individual stock picking may consider equity income funds, which many advisers claim can squeeze out greater returns and spread risk for investors by pooling money into a wide range of companies that tend to pay consistently higher dividends. 

Those uncomfortable with the prospect of managing their own finances may feel that the cost of appointing an adviser or wealth manager to manage some or all of their affairs is justified by achieving access to expert opinion and guidance.   

Whilst investment performance will grab the headlines, every bit as important is wealth preservation and, wherever possible, canny investors should take full advantage of tax efficient wrappers.  

Up to £11,520 can be invested in an Isa in this tax year which delivers returns on a wide range of investments, including AIM stocks for the first time, free of income tax and capital gains tax. 

Alternative Investment Opportunities

Those seeking alternative investment opportunities may wish to investigate the slew of renewable energy projects that are available at what is the start of the National Ethical Investments Week. 

Returns from electricity generated as well as the subsidies such initiatives attract tend to rise with inflation and the level of returns appeal to investors as well as those anxious to prove their green credentials. 

Solar energy is a hot topic and a £200m initial public offering by Foresight Solar Fund this week gives those investing £1,000 or more a 6p dividend on their share in the ownership of eight of the biggest solar parks in the UK. 

Alternatives in the solar sector are the Good Energy corporate mini-bond, paying 7.25% over four years, and Energy Bonds, a subsidiary of Australian CBD Energy offering 6.5% over three years, and with a bonus of six weeks' interest to those investing before 27th October. 

Longer term, 6.65% fixed-rate debentures investing in existing solar installations on school roofs in Nottinghamshire are available through Abundance Generation where investors have to put money away for a nineteen year term - but with investments starting at just £5. 

However, those considering an investment into any of the variations on mini-bonds that are on offer must ensure that they fully understand the structure of the company to which they are entrusting their money, and make a value judgement as to the likelihood of it achieving its longer-term financial objectives in the context of prevailing business and market forces. Investigate too the ability to hold any investment in a tax-efficient wrapper as erosion, even at the basic level of tax, wipes out a sizeable portion of headline return - and remember, any such investment is likely to be illiquid, so only tie up any cash that you can say with a degree of certainly that you will not need to access before the maturity of the product.         

Those feeling that they have missed the post may find comfort in the fact that further IPOs are believed to be in train, including Merlin Entertainment and Saga. 

Retail Bond Expert hopes that A2D’s recent experience will confirm that well priced and structured corporate debt, particularly with a rating, continues to generate strong interest and thereby encourage other issuers to add to the diversity of this fledgling market.    

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