The name is Bond, Corporate Bond

Historically high levels of investment grade corporate credit spreads are boosting the yield from corporate bond funds to a recession-beating range of 5 per cent to 8 per cent, according to wealth manager HFM Columbus.

According to HFM Columbus investment director Rob Pemberton, income-paying vehicles such as corporate bonds and equity income funds are one of the very few options still standing in the wasteland savers find themselves in following the most recent base rate cut.

However, no investment that offers a potential return better than cash is risk free of course and capital is at risk with these funds. For this reason, manager selection is crucially important. Investors are particularly intolerant of losses in their fixed interest investments and simply buying a corporate bond index fund increases the vulnerability to capital loss through default. A good manager should be able to avoid the potholes.

“With 2009 officially on a recession footing, we are recommending a few carefully selected corporate bond, strategic bond and equity income funds as sources of income for those with a longer term investment horizon,” said Pemberton.

With a distribution yield of 6.45 per cent, Pemberton backs Invesco Perpetual Corporate Bond Fund as a top selection, along with Fidelity’s Moneybuilder at 5.35 per cent and - for those looking for a slightly higher level of risk in the strategic bond fund arena - M&G’s Optimal Income Fund at 6.9 per cent.

“At a wider level, there is a breakdown in investor trust in the ability of financial markets and the banks to perform their main function of allocating capital throughout the economy,” he added.

“The state is currently taking over from market forces, supposedly only for a short term, but we seem to be heading forwards into failed systems we thought had been left behind decades ago.

“Given this background it is hardly surprising that markets have been close to testing the October lows. What doesn’t help at all is that Government policy-making seems so rushed and confused and, especially in the UK, so openly political at a time when every economic report points us towards ever deeper recession.

“In the face of this overt pessimism capital preservation has become more important than capital performance. Investment flows have been overwhelmingly towards the most defensive assets, namely cash and Government bonds, but these assets no longer offer value.”

As Pemberton points out, deposit rates are scarcely better than zero in some instances, whilst for gilts to rally further there needs to be a prolonged spell of deflation.

“This is not impossible of course, and maybe the gilt rally still has some legs,” he said, “but all the Government and central bank stimulus must surely have an effect at some time and this in time will be inflationary and bad news for government bonds. This makes gilts a two-way street, not a one-way bet.

“Because the market has taken no prisoners at all it means the securities of even financially robust and well managed companies have taken a hammering along with everything else.

“The equity of companies with strong balance sheets and large, well covered dividends also offer considerable long term value with the income flows giving some downside protection. Buying these assets through open-ended, daily dealt funds gives an investor exposure to the long term value opportunities with the comfort of liquidity, transparency, easy access and regulation. It’s a good place to start putting some trust.

“Whilst the current climate persists, we feel confident to recommend corporate bonds and equity income funds as a key part of any income seeking investor’s portfolio in 2009.”

For more information, visit hfmcolumbus.co.uk