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Creditors instead of owners
A unique chance to earn equity-style returns – with corporate bonds
A well-diversified portfolio of high quality corporate bonds (investment grade), as exemplified by the fund Raiffeisen Euro Corporates, currently offers an implied yield of around 4 % per annum.
Holders of corporate bonds are not nearly as worried as shareholders when it comes to the very reserved earnings outlooks that companies are currently forecasting. For creditors, the main point is that interest payment obligations are met and the bonds are paid off. They enjoy the great advantage that this fits right in with companies’ survival interests: companies will do almost anything they can to avoid defaulting on bonds, and thus to avoid bankruptcy, even if this happens at the expense of the shareholders. Consequently, bondholders have a decisive edge, both when it comes to corporate policy and in terms of recourse to companies’ assets. And this is merely one more reason to prefer corporate bonds over equity investments.
Default risks will rise, but are broadly priced in already…
Of course, high quality corporate bonds are not a risk-free investment. And in light of the economic downturn, it is certain that the currently low default rates will rise, even for companies with good credit ratings. But market prices are already discounting default rates, which are more than twice to three times higher than the peak levels that were recorded during earlier recessions (1991, 2002). Accordingly, even if economic performance remains poor, a good deal of the possible default risks have already been discounted in bond prices.
…and can be limited with smart selection
With a good selection of bonds and strict risk management, these default risks can also be also be held in check quite well. In this regard, Raiffeisen Euro Corporates has been able to demonstrate top-notch performance for many years now, along with extremely low default rates, leaving this fund well prepared to continue its success in the future.
In the wake of the heightened risk perception resulting from the financial crisis and as a result demographic trends, in the future investors will increasingly turn to higher quality assets. Thanks to the increasing inflows of capital, this may generate additional potential for returns in the years ahead, as prices for these instruments rise.
High quality corporate bonds currently offer a very attractive risk-return relationship, both in absolute terms and compared to equities and government bonds, and should not be left out of any well balanced investment portfolio. Indeed, in the years ahead investors stand to gain a great deal by placing more emphasis on these assets.