Corporate bonds: not as risky as you think

What's more dangerous to own, company debt or government debt? Once, your instinctive answer might have been company debt. But a glance back in history might make you rethink.

Consider the riskiness of owning a million francs' worth of shares in a French champagne company in 1928, compared with that of owning the equivalent value in long-term German bonds, says John Dizard in the Financial Times. If you'd gone for the shares, they would be extremely valuable today. The bond certificates and interest coupons would not be.

You might think this can't happen again. But "almost all euro area sovereign debt is governed by local law". Italian sovereign debt, for example, is issued under the authority of the Decree of the President of the Republic. So the terms can be changed "by some future decree made at a then-president's discretion". Not the kind of thing to hold in a crisis.

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So what should you hold? Some kinds of equities work, says Dizard. He'd avoid most commodity producers. Despite the attractions of real' assets, companies that produce them are open to "confiscatory taxation" and possible seizure.

Instead, you should (as MoneyWeek has advised for years) hold shares in firms with a "durable international brand or a corporate design or technology team that has shown an ability to replicate itself over generations". Better still, hold their corporate bonds. Why? Because across Europe they are "usually governed by English law", so they "can't change their terms or escape their obligations".

These days, accessing the bond markets isn't hard, in Britain at least. In 2010 the ORB market was set up. It lets firms issue bonds to ordinary investors, who can buy in small amounts (£1,000-plus). In its first 12 months, £100m in bonds was issued, mostly by big-name firms (such as Tesco). So far this year, that number is £1.2bn.

This makes some sense. Investors are fed up with the low returns they can make on cash (4% maximum if you lock it up for five years). As Oliver Hemsley, chief executive of broker Numis, tells Matthew Attwood on efinancialnews.com: if they can get 5% to 7% on their money from "decent corporate credits", that's got to be better than keeping it on deposit at the bank, which then lends it to "the same people at the same rate, if not higher".

There is risk, of course. If you keep your bond to maturity, you should get your capital back. But you won't if the issuer goes bust. And rising inflation might mean you don't get it back in real terms anyway. For more on ORB, see Londonstockexchange.com; for specific bonds, see Fixedincomeinvestor.co.uk.