Investors who have put their faith in high street bank investment funds have had to endure shockingly bad performance, according to new data from investment fund analyst Moneyspider.com
While it is common knowledge that the fortunes of the big banks have suffered badly in the credit crunch, many thousands of investors with household name lenders will be severely out of pocket – and older investors pinning their hopes on income funds to support their retirement are particularly badly hit, says the fund analyst.
NatWest, Royal Bank of Scotland, Halifax, HSBC and the Lloyds/TSB run Scottish Widows’ corporate bond and income funds have all experienced severe under-performance in the past 12 months
Corporate bond funds, which account for around £10 billion of all ISA, PEP and Non ISA investment according to the industry organisation the Investment Management Association (IMA) – all have the lowest E rating under the Moneyspider.com system, which ranks funds from A (best performer) to E (worst).
How the banks are failing their income seeking investors
Bond funds are particularly popular with older investors hurt by historically low base rates and desperate for additional income to boost pensions. One of the UK’s biggest corporate bond funds, run by banking giant HSBC – with around £550 million under management – is down by 4.7 %
in the year to March 2008, despite soaring stock market growth in the first, second and third quarters of 2007. And that’s before allowing for inflation.
Halifax’s corporate bond fund is down 6.7 % year on year, while banking giant NatWest’s bond fund has fallen 6.4% to go with its E rating. (Source: Financial Express March 2008)
Most of the high street bank corporate bond funds are disappointing their investors, the majority of whom are risk adverse, having traditionally stayed away from the equity market in favour of supposedly low risk bond funds.
“Invariably, investors are seduced into going to the banks because they think the name is trustworthy and they want to go into the branch and talk to someone about investing – and the fact that base rate has been so historically low over the past five or so years has given bank sales teams the opportunity to push corporate bonds as providing an opportunity to maximise income.” points out Moneyspider director Tony Ahearne.
“Corporate Bonds are often sold to low-risk investors, who are invariably under the impression that they can enjoy higher income than they could get in a standard savings account, plus some capital growth,”
“Corporate bonds are the second biggest ISA sector, boasting hundreds of thousands of investors, and there is likely to be a great deal more loss to come,” he predicts.
“Our research will shock thousands of older investors hoping for income from their corporate bond funds - and it highlights the dangers of simply relying on a well known name to deliver good returns.”
And if you’re not invested in a Corporate Bond Fund it’s still crucial to pick the right funds from the best performing Managers. If you had invested £5000 in the best performer fund over the last 3 years it would now be worth £18523. But if you’d picked the worst your £5000 would now be worth just £2106. A difference of a staggering £16417! (Source: Moneyspider.com / Financial Express May 2008).
Tony Ahearne, Director, Moneyspider Limited.
Tony has been an Independent Financial Advisor for over 30 years. (The above article is based on the author’s understanding of the new rules and investors are advised to take their own professional advice.)