Corporate bonds: Advantages for wealth management investors

The expansion of the investment opportunities at Formuepleje takes place specifically through Optimum, Pareto and Safe, where a small part of the mortgage bonds have been replaced by corporate bonds. This will improve customers’ long-term risk-adjusted returns.

We well know the New Testament quote: “Divide your goods into seven eight parts, for you do not know what evil can happen on Earth.” It is simply the whole idea behind risk management, and converted t the present, the spread must be on several types of asset classes, and partly on many individual securities. At the same time, the composition of the portfolio must be closely linked to an analysis of the expected return in relation to the risk. This is the fundamental reason for what the wealth management supplies to investors, which means that we are constantly trying to improve the relationship between the expected return and the risk.

Corporate bonds in certain portfolios

It is precisely the diversification of risk and the possibility of putting together even more attractive portfolios that are behind Formuepleje’s decision to expand the portfolios to include corporate bonds . At the same time, we are aware that corporate bonds in stress periods can be very little liquid. Therefore, they only represent a minor share in the capital funds where the debt is moderate – and therefore are not included at all in Epikur and Penta , where the debt is greatest. It was completed in early March.

Return and liquidity

There have been two main considerations for the investment in a new asset class. One has been to add an asset that can deliver an attractive return on bonds that are significantly higher than what Danish mortgage bonds can currently provide. The expected return on the portfolios of corporate bonds already invested in is approximately 5-6 per cent after costs.

But why not invest everything in corporate bonds? This is due to another and important consideration for risk diversification and including requirements for liquidity in the leveraged portfolios. An investment in corporate bonds is much less liquid than an investment in Danish mortgage bonds. In the event of severe financial market turmoil, corporate bonds will only be difficult to trade, and if they can, it will be at low prices and thus losses.

Therefore, it is optimal to have a small portion of the assets placed in corporate bonds and even only in Pareto and Safe , as the leverage and the requirement for liquidity at Epikur and Penta are too high for corporate bonds to become part of the portfolio. In Optimum there is no gearing, which means that the requirement for high liquidity is less.

Therefore, in principle, much more can be invested than the current 10 per cent of the assets. In Pareto, which has only one-time leverage, up to 10 percent of its assets are invested in corporate bonds. In Safe, leverage is slightly higher, but still moderate, and here there is a limit of 5 percent of the assets. In Epikur and Penta, the gearing is higher – therefore, it is also the largest requirement for liquidity at all times – and for the same reason there is no investment in corporate bonds at all.

What are corporate bonds?

Corporate bonds are bonds issued by companies in the same way as government bonds are issued by governments. Generally, companies that need money to fund their business or new ventures can choose from three sources of finance: stocks, bank loans, or corporate bonds.

This is due, firstly, to the fact that the investor must make a very thorough credit analysis of the company, determine the value of any collateral and read and analyze the bond terms that are often on several hundred pages. The return comes from any other bond from coupon rate and price gain. The bonds are often listed on a stock exchange, but they are traded much more rarely than a stock and are therefore less liquid than a large listed stock or a government or mortgage bond.

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