Reliable bond funds can realistically expect to offer income-only returns in excess of 36% over the ...
Reliable bond funds can realistically expect to offer income-only returns in excess of 36% over the next five-year period.
That was the calculation offered by David Roberts, head of credit at Britannic Asset Management, as he urged intermediaries not to believe the recent surge of press reporting that has portrayed bonds as expensive and running out of steam.
Roberts told the audience if equity returns were to match his likely bond returns figure, the FTSE would have to rise to 4,700 by the end of 2007. The calculation was made on the basis of ignoring volume, assuming the same risk profile for bonds and equities and factoring in equity dividend yields running at an annual 3.5%. If the dividend yields were to run at 0%, the FTSE would have to hit 5,500 for the bonds figure to be matched.
'Bond funds are not a get-rich-quick schemes and I urge you to avoid anyone who says they are,' said Roberts. 'However, neither are they a get-poor-quick scheme and, at times, that is no bad thing.'
Having underlined how the corporate bond market has outperformed the FTSE by 59% in the past five years, Roberts challenged those who are still entranced by the UK 'cult of equity.' He asked: 'Does your client base still have the risk appetite? Do they need that uncertainty of equities? Do they want that uncertainty or will they settle for 30% or 36%?'
Roberts reminded his audience of the stability of bonds by showing how five years ago the average UK corporate bond paid a real return of 2.8%, taking into account 3.7% inflation. At the end of 2002, with inflation lower, the average real return was exactly the same.
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