At a noteholder meeting in late March, London Stock Exchange Group announced that it would reduce the minimum investment amount on three of its own corporate bonds from £100,000 to £1,000. The change – which took effect on 20th April – is designed to make it easier for retail investors to access these instruments.
These bonds are now included in London Stock Exchange’s access bonds and also qualify as plain vanilla listed bonds since they meet FCA criteria designed to ensure simplicity and transparency.
According to James Leather, Director of Corporate Treasury at Corium Treasury, the move is a significant milestone that will hopefully lead to others following suit. His view is that making investment grade corporate bonds accessible to retail investors improves their investment choices, is good for issuers and is good for the sterling bond market generally.
Holly Olson, Corporate Treasurer AFL Global agrees that retail investors represent a small percentage of the total investors participating in the bond market – and that this percentage is even lower outside of the US.
“It is peculiar when you think about it because if everyone held to the 50/50 or 60/40 equity/bond allocation, you would think the number of retail bond investors would be on par with the standard portfolio allocation – but it is not,” she says.
Olson reckons this could be down to the fact that bonds are more complex than straight equity investments. For example, they can have callable options or sophisticated formulas as in collateralised mortgage obligation and bear credit risk or other terms that can easily be misunderstood.
“I suspect that most retail investors place their money in bond mutual funds rather than directly into the bonds themselves,” says Olson, who adds that even if bonds were more accessible to retail investors, she is not convinced that they will become a major factor in how and when companies decide to issue.
“I believe companies will stick to their strategic optimal capital structure as the driving force behind whether they issue more bonds, commercial paper, equity or take on loans – not retail investors,” she says.
Issuing bonds costs money and Olson believes companies will place a greater emphasis on the cost of capital and the capital having the most favourable terms.
“While it is likely there is a bump up in market liquidity due to increased retail participation – which would likely lower the cost of capital – I question whether the impact would be significant to encourage a change in corporate behaviour,” she concludes.
However, Kyle Caldwell, Funds and Investment Education Editor at interactive investor, describes the lower minimum investment amounts for corporate bonds as a game changer and says investing in such bonds has been a costly process for too long.
“As ever, diversification is key and while it is very early days, over time as the market matures investors will have more bonds to choose from and then potentially be able to spread risk far and wide by owning a range of corporate bonds alongside other assets,” he adds.
