Check out your risk level, Isis warns investors

Isis Asset Management has warned investors that not all bond funds are low-risk. It says more needs to be done to educate investors about bonds and the different types of funds on offer. Although most investors are aware of the different risk profiles between emerging market equity and UK equity income funds, the firm says they are less clear in their understanding of bond funds. Investors remain wary of equities and confused about their tax treatment in Isas, and so are still investing heavily in corporate bonds, Isis said. James Foster, head of credit at Isis, says: “Corporate bonds are often seen as simply a ‘low-risk’ port in a storm when the equity market looks volatile. I am concerned investors do not fully understand the different dynamics of the corporate bond spectrum.” Foster says the returns on gilts and investment-grade bonds are heavily driven by interest-rate changes, but high-yield bonds are much more reflective of the wider economic cycle and have a greater correlation to the equity market. During 2003 the Merrill Lynch European High Yield index returned 25.7%, compared with 5.5% from investment-grade bonds and 20.9% for the FTSE All-Share. Isis warns investors to be aware of whether fund managers take their charges from capital or income, as this will affect the headline yield and the capital returns. An Isis guide to bond investment is available on 0845 799 2299.