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Fixed On Bonds

Where can an investor find high yield from investment grade issuers?

Rob James

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Where can an investor find high yield from investment grade issuers? Sounds unlikely doesn’t it, particularly in a world of quantitative easing where central banks are deliberately keeping yields on nearly all bonds at record low levels.

But there is a niche where the central banks do not go. Bonds issued by banks are ineligible for the corporate bond buying program and so their yields are less disturbed than for other corporate bonds. Within bank bonds there is a class of bond called Additional Tier 1 (AT1), or more colloquially CoCo. These bonds form part of the capital base of banks and are viewed by some investors as being highly risky. As a result the bonds have high yields, typically in the 5% region. It is indeed true that in the event that a bank finds itself in serious distress, requiring resolution (the new administration process for failing banks), then the bonds would in all likelihood be valueless. But that would also be true for the shares in the bank and also its Tier 2 bonds and probably its no-preferred senior bonds too. But is that really any different from investing in the bonds of any other type of business? So the key here is to invest only in the very highest quality banks where this outcome is very remote.

One of the reasons we feel very comfortable in investing in these CoCos is that bank balance sheets have changed since the Global Financial Crisis. Gone are the structured assets that proved so toxic to be replaced with more straightforward loans and bonds. But the biggest change, and the one that makes all the difference to CoCo holders, is that equity has increased many fold. Equity is the part of the bank that belongs to shareholders, and it is the first in line to bear pain if the bank makes a loss. Bank equity levels today, as measured by the Core Equity Tier 1 ratio, are multiples of what they were, and are able to withstand the enormous losses that regulators test them with each year in the annual Stress Tests. It is this equity that acts as protection for both the bank’s depositors but also its bondholders, including CoCo bondholders.

A second reason is that when dividend payments from banks were stopped during 2020, explicitly European regulators stated that payments to CoCo holders should continue uninterrupted. This support for the asset class from regulators is very important.

Through thorough analysis we are able to put together a diversified portfolio of these CoCos, from the finest quality issuers, giving the Premier Miton Financial Capital Securities Fund a yield above 4.5%.

So high yield from investment grade issuers.

Rob James Fund Manager

Risks

Past performance of an investment is not an indication of how it will perform in the future. The value of your investment and any income generated by your investment can go down as well as up, and you could get back less than you invested.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

The level of income paid by the fund may fluctuate and is not guaranteed.

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Important information

For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within this document.

This fund is available for purchase by Professional Clients and Eligible Counterparties who have signed the appropriate investor letter issued by Premier Miton and is subject to minimum initial subscription and minimum holding requirements. The fund is not suitable for Retail Clients.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock does not constitute a recommendation to buy or sell the stock.

All data is sourced to Premier Miton unless otherwise stated. Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

A free, English language copy of the fund’s full prospectus, the Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or you can request copies by calling us on 01483 306090.

Financial promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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