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Mini-bonds: the trendy investment that's bad for most investors

by Lovemoney Staff AdrianLowcock on 22 May 2013  |  Comments 1 comment

Adrian Lowcock of Hargreaves Lansdown argues that the current trend for mini-bonds could be bad for your financial health.

Mini-bonds: the trendy investment that's bad for most investors

Mini-bonds issued by the likes of the Jockey Club and Nuffield Health have attracted a lot of attention recently. And they have divided opinion. Today Adrian Lowcock, investment manager at Hargreaves Lansdown, looks at why the mini-bond trend concerns him. Tomorrow David Kilmartin, business development director at Capita Registrars will look at the positives of mini-bonds.

The search for income is one of the biggest trends in investments at the moment. The interest paid on cash has slowly been squeezed to the point where only a handful of accounts now pay interest above the rate of inflation. Investors are willing to pay higher prices for income yield wherever they can find it.

This search for yield has created an opportunity for others and we are seeing an increasing number of companies issuing retail bonds. Most recently Nuffield Health has announced it is issuing a bond paying 6% gross interest for a fixed five-year term.

There are a number of concerns I have about the such bonds and their marketing to the public.

Mini-bonds are unsuitable for many

Firstly there are two types of retails bonds; those which are listed on a stock exchange and tradeable and those which are unlisted, sometimes called mini-bonds. My greatest concern is with those that are unlisted.

I do not think unlisted bonds are appropriate for the majority of retail investors. Investors should be looking for certain things from their investments, namely, it should be easy to sell them, and there should be a secondary market where they can get transparent pricing to determine the value of their investment. In addition, few investors want to hold a corporate bond from launch to maturity. 

A secondary market gives investors the opportunity to value and trade the bond. The main reason for doing that is to reduce costs. 

But with mini-bonds you have to hold them until maturity. As a result, you only benefit from the income return - there's no chance to take advantage if it grows in value during the term by selling it off.

Paying tax

Unlisted bonds are also unattractive investments because they may not be eligible for inclusion inside an ISA. This is very important because the income earned on bonds or bond funds inside an ISA is completely tax free.

For example, the gross yield for the Jupiter Strategic Bond is 5.4%. The yield on the Nuffield Bond is 6% for a basic rate taxpayer, meaning the net yield would be 4.8%. For  a higher rate taxpayer it would be 3.6%. Once you take tax into consideration, suddenly it's not that attractive an investment opportunity.


Some bonds issue “bonus” interest, in the form of vouchers, points or other perks. These cost the company very little but are awarded to the investor at retail price. 

I would much rather have the cash, then decide how I want to spend my money or save it. I put a greater value on a cash interest than on incentives to spend money.

If it all goes wrong

Finally, the structure of the bond - and indeed the company issuing the bond - has a significant effect on the risks to the investor. Many of these bonds are issued by subsidiaries and are unsecured against any specific company assets. That means that in the event of bankruptcy, investors in mini-bonds are at the bottom of the list for repayment.

Why I'm uncomfortable

There is a lot of work required to analyse bonds. The idea that investors can buy unlisted bonds which cannot be traded makes me very uncomfortable   

For listed bonds, the London Stock Exchange has made significant progress with its Order book for Retail Bonds (ORB) market in providing essential liquidity, making it easier to value your investment and to be able to easily hold the bond inside SIPP and ISA wrappers. 

I urge investors to think carefully about any individual bond before you buy as you really need to appreciate the risks you are taking when lending your hard earned money to a company. I understand the reasons for looking to alternatives to cash. But you must consider the risks, liquidity, tax position and available alternative investments before handing over your cash.

Adrian Lowcock is investment manager at Hargreaves Lansdown

More on investment:

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Why the 'discount tax' is good news for investors

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Comments (1)

  • JRAY100
    Love rating 67
    JRAY100 said

    A well-healed investing friend of mine advises me "why take the risk?"... better to keep investments both liquid and tax free... oh and high yield and safe!

    Why not go for capital gain... TAX FREE up to the limit of 10,900 for 2013/14.

    Here's a tip of a method that I use... my portfolio went UP when the market had a DOWNER today (29-05-13) - the FTSE 100 falling 134p!

    Use the ETF's tracking (x2 = double the change) the FTSE 100 both LONG & SHORT!

    LUK2 tracks x2 LONG

    SUK2 tracks x2 SHORT

    Buy holdings of each (a straddle) and adjust your positions as the market moves.

    Be quite dispassionate (unlike holding your maiden aunt's favourite share).

    If the market goes in the 'wrong direction' then abandonning a SHORT position (or just half of it), which becomes equivalent to buying a LONG position, except that you release funds, in readiness to buy back the SHORT at a cheaper price, the market having risen (and vice versa).

    If you happen to time it correctly and use the sold SHORT money for a LONG (and vice versa), then you can make x2 x2 = x4 i.e. FOUR TIMES the FTSE100 change!!!!

    No need to worry about companies being torpedoed or catastrophic events, because on average you are covered both long and short or with some cash in readiness for the next position!

    Your positions are always liquid bar weekends and bank holidays.

    They are also ISA-able and there is no stamp duty or PTM levy - use a cheap flat fee broker such as Jarvis IM costing £9.50 both buying and selling.

    Best of Luck!

    Report on 29 May 2013  |  Love thisLove  0 loves

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