Life is pretty unfair really. All the (seemingly) best stuff is reserved for people with the most money.
And finance is no different.
If you’re taking out a massive mortgage for an eight-bed, detached mansion on a private estate you can borrow at interest rates that are lower than for an ex-local studio flat.
When you are trading the higher the value of your account the lower your will be able to negotiate your commission and financing rates down.
The same is true of fixed income investing. If you are investing in bonds and want a diverse portfolio you are excluded from a huge section of the market by minimum denomination sizes of £100,000 for corporate bonds. These minimum transaction sizes can be even higher for government bonds.
But not any longer. Enter WiseAlpha, here we talk to Rezaah Ahmad, the CEO and founder about how the platform provides access to previously institutional only high-yielding corporate bonds for the everyday investor.
First off, what is WiseAlpha and why did you set it up?
Wisealpha is a one of a kind digital bond market giving everyday investors access to corporate bonds previously reserved for institutions and wealthy investors.
These bonds tend to be issued by established £1bn valued companies, many of which are listed on the London Stock Exchange or are owned by large conglomerates and private equity firms.
Having previously worked for a global bank structuring corporate bonds and then investing in the asset class while in the asset management industry I understood the quality of the asset class (Our article, “The superiority of corporate bonds” provides a useful overview).
However, it always amazed me that as an individual I could buy £100 of Ocado equity but if I wanted to buy Ocado bonds I needed £100,000.
That’s obviously crazy and that’s why we set up WiseAlpha, to liberalise the corporate bond market and make the biggest and best bond investments available to all.
The traditional way to buy bonds is through your stockbroker. What makes WiseAlpha unique when it comes to fixed income investing?
Regular retail stock brokers provide access to a limited selection of retail bonds listed on the London Stock Exchange ORB which tends to be long-dated and low yielding.
WiseAlpha is unique in that it focuses on corporate bonds that are traded over-the-counter in the institutional banking market where access, size and liquidity makes it difficult for retail investors to participate (this is also where the majority of companies and the biggest brand companies issue their bonds).
By using WiseAlpha everyday investors can buy a small piece of large corporate bond issues via our Notes from just £100 instead of the regular £100,000 or £200,000 minimum buy-in.
Do you think that all investors should include bonds in their portfolio?
Yes, bonds are a must have for a portfolio and corporate bonds in my view should be the biggest element of any portfolio. Why, you say?
Historically, when people think of bonds they think of a savings bond from a bank or gilts/government bonds or even premium bonds where the returns are paltry.
The reality is that there is a whole spectrum of bonds offering between 3-15% in the corporate bond market, many of which are issued by established FTSE 350 listed companies but that just haven’t been easily available for everyday investors to buy.
Sterling high yield bonds and even investment grade bonds have for example generated returns in excess of 9% per annum over the last 20 years compared to the FTSE 100 which trails at under 4% (see “The superiority of corporate bonds” ).
Clearly, when the bonds of the same companies are performing better than the more risky and more volatile equity, it’s a no brainer to weight towards bonds.
How do you decide what bonds to include on the platform?
We try to provide a range of bonds on the site that represent the sectors and variety in the bond market and are increasing this choice all the time.
Liquidity has always been a bit of an issue with crowdfunding and peer2peer investment platforms. How easy is it for WiseAlpha clients to liquidate their positions and are there any penalties for selling before maturity?
All of WiseAlpha’s clients to date who have wanted liquidity have found it but having said that it’s important to note that clients looking to sell on our secondary market are reliant on another user buying their holding.
We haven’t suffered the same liquidity issues that P2P or crowdfunding platforms have because the bonds on our site are larger and the names more recognisable which tends to attract more buyers per individual investment.
Many either don’t understand bonds or think that they are safer investments that shares. But sometimes they can prove riskier. What would you say are the top three risks involved in having bonds in a portfolio?
In general corporate bonds are less risky and less volatile than equities. This is because bondholders are higher in the pecking order when it comes to claiming the assets of a company if things go wrong.
Indeed since many FTSE 350 companies have both bonds and equity it is clearly the case that the bonds are less risky than the equity e.g. Ocado Tesco, or The AA are examples of listed companies that have both.
However, there are different types of risks to consider when buying bonds. While equities may have greater capital and price volatility risk, bonds have different factors to consider that might affect the price of the bond or the ability of the bond to be repaid. These include:
Duration risk – the longer the maturity of a bond the greater the price volatility from changes in interest rates by the BoE.
Some corporate bond issuers have multi-layered capital structures and use high leverage (i.e a large portion of debt versus the value of the company) and this can sometimes hinder a company’s growth prospects and ability to service it’s bonds.
So, while in general bonds are less risky there are also some companies that have borrowed too much and can get into difficulty and so the risk of excess borrowing is worth considering. Unlike fixed-rate bonds issued by banks these bonds are investments not covered by the FSCS deposit insurance scheme
Bonds are in general less liquid than equities and so for people looking to exit quickly, this can present an additional risk.
And finally, what would be your top five online resources for investors who want to start trading or investing in bonds?
There aren’t a whole lot of easy bond trading guides/or resources but here are a few resources (including our own)
Some WiseAlpha resources:
2) A nice bond market overview from the team at S&P: http://www.highyieldbond.com/primer/
3) A good read about the fixed income industry from an established publishing house: High Yield Debt: An Insider’s Guide to the Marketplace
4) Fixed income investor
5) Other sources: Moodys
Please note as with all investing your capital is at risk. No FSCS cover.