Unlike equities, bonds confer no ownership or voting rights on their holders. However, investors in bonds are creditors to companies or governments, with the advantage that they have a have a higher claim on assets than shareholders.
In other words, in the event of bankruptcy, bondholders will get paid before shareholders as they are higher in the capital structure.
However, bondholders do not share in the profits if a company does well, but are entitled only to have their principal repaid on a specified redemption date, along with regular interest payments, or ‘coupons’.
Alex Robertson, client portfolio manager of Royal London Asset Management, says while there is generally less risk in owning bonds relative to shares, the returns that bondholders can expect tend to be generally lower.
With equities, the dividend is uncertain, as is the return of capital. On the other hand, capital appreciation is unlimited.
With bonds, Annemarieke Christian, product specialist at Legg Mason, says the coupon is certain, as is the return of principal at maturity – barring, of course, default by the issuer. Capital appreciation is therefore limited.
In recent times, and in particular relation to government bonds issues by ‘safe haven’ countries such as the UK and the US, yields on bonds have fallen to such a level that many are questioning whether they have effectively in many instances become ‘too expensive’.
This has, in turn, pushed many investors that had a significant fixed income element within their portfolio to equity income, or bond funds with alternative strategies such as ‘strategic’ bond funds and high-yield.
