What do you do if you need investment income?

• Equity returns are negative or very volatile
• Property funds are lowering dividends
• Savings and fixed deposits returns are declining and are negative after inflation and taxes

Are corporate bonds the answer?

In Germany, Italy, Australia and New Zealand big new corporate bond issues are being snapped up by private investors. In Japan where equities, property and deposits have been unattractive for years - retail investors bought just over a quarter of investment-grade bonds issued in the first quarter this year.

On the face of it corporate bonds or bond funds are attractive, for example the Markit iBoxx euro-denominated corporate bond index, filled with well known companies and with a coupon of 5.2 per cent, is currently yielding 7.2 per cent.

In the UK, corporate bond funds accounted for three-quarters of net retail investor sales in February, according to the Investment Management Association.

But you should be careful.

Any new investor in corporate bond funds hoping for quick return may be disappointed. Credit markets are in a severe slump and as a result is largely immune to the increases in other assets. Additionally with bonds the potential upside is limited while the downside caused by deteriorating credit worthiness and interest rate movements can be substantial.

Furthermore investors should bear in mind that there are good reasons why bond markets have historically been dominated by professionals. An investor buying a share in a company has one thing to monitor. With bonds, there may be dozens of alternatives from the same issuer, each with its own interest rate curve and maturity.

Also prices are driven by credit worthiness, expressed by credit agency ratings. In the first quarter 2009 the rating agencies have reported the largest number of companies with rating deterioration since the depression in the 1930’s.

Also trading volumes are low. For example no Vodafone bond has anything like the liquidity of the stock. Private investors should also be weary of markets where professionals are staying away. Investors with long term inflation expectation will also do well avoiding long term fixed rate bonds as they would most likely be the worst performing asset class.

The question remains…

What do I do with my cash at the moment?

• I am currently more than happy to keep my cash in call and term deposits with a stable bank that had adequate deposit insurance.
• Should your cash holdings exceed the deposit insurance limit I suggest you spread the cash around to ensure you have adequate cover.
• Now is not the time to run after long term investments with high yields in an asset class you have little knowledge of.