The FCA has issued a note to investors citing a risk that corporate bond funds may produce losses.
In the note on its website, What is a Corporate Bond Fund, the FCA warned that investors should not consider corporate bond funds to be risk free.
It said: “If you need to access your money quickly it is possible that, in difficult market conditions, it could be hard to sell holdings in corporate bond funds.
“This is because there is low trading activity in the markets for many of the bonds held by these funds – and the market for underlying bonds has shrunk in recent years.
“In extreme market conditions fund managers could become unable to sell sufficient quantities of bond holdings to fulfil redemption orders, leaving investors unable to sell fund units.”
It cited the effect that interest rate movements could have on bond prices, and the possibility of corporate defaults, adding that investors should consider whether they could “financially withstand a fall in the value of their units” and “whether they could take their money out quickly”.
David Roberts, head of fixed income for Kames Capital, said the asset manager had no official position on the FCA note, adding: “We have identified the maximum size of mutual fund assets we would be prepared to run and levels we would consider closing funds at for our different strategies.
“We have stated publicly our concern that banking capital committed to the market is lower than in years gone by and even in the depths of the crisis in 2009, each of our funds remained open, offered daily liquidity and did not “gate” investors.”
He added that Kames has sacrificed and “will sacrifice marginal investment gains” to preserve fund liquidity where this is in the best interests of investors.
A spokesman for Fidelity said that maintaining prudent portfolio liquidity is integral to managing Fidelity’s corporate bond fund, Fidelity Moneybuilder Income.
He said: “Diversification is key. Portfolio manager Ian Spreadbury avoids building large positions in single bonds and concentrations in less liquid parts of market, such as subordinated financials.
“Also, a liquidity cushion of cash and gilts is maintained at all times, between 5 to 10 per cent.”
The spokesman added that Fidelity’s traders sit next to portfolio managers providing a continuous appraisal of market liquidity.
Adviser view
Jason Hollands, managing director, business development and communications for London-based Bestinvest, said:“Seemingly this is a generic explanation of corporate bond funds and their risks. Bond funds have not been so popular over the past couple of years, so everything is in the timing of this message.
“One way to read this is that the FCA may be concerned that people who bought these a couple of years ago may not be fully aware of the risks from rising interest rates, buying on the back of superior yields compared to ultra low interest rates. With rate rises getting ever nearer, it could be construed that the FCA wants to send a subtle reminder.”
