2. Keep costs low
A 4 per cent return is above inflation and a decent chunk over cash rates, but if the total costs of your investment solution are more than 2 per cent it is going to lead to a very disappointed investor over time.
3. Sell early
Optimise returns by selling ahead of maturity. With persistently low rates (the perpetually moving time horizon of base rate rises), bonds will generate non-linear returns, paying investors disproportionately high returns ahead of the yield to maturity in the early years and less in the last few years. If this is news to you, then you might be better referring your client to a fund or bond expert.
4. Avoid gilt funds
Avoid gilt funds, vanilla corporate bond funds and short-dated bond funds. After fees the return on all of these, until interest rates have normalised, is likely to be low and less than inflation. They are now a very expensive way to diversify away from equities in a traditional balanced portfolio, and any kind of rate rise will wipe out returns.
5. Go for higher yield funds
Use funds that can access the higher yield market, the new issue market where rates will track up if interest rates rise and that can hedge against rate rises.
Key facts
* Bonds will always be less volatile than equities and are the only way to generate predictable returns.
* It is still possible to earn an inflation plus returns, net of fees in individual bonds with relatively low risk, but it requires very careful selection, active management and low costs.
* The return on lower risk bond and gilt funds are likely to be less than inflation net fees, they are an increasingly expensive hedge against equities in a traditional balanced portfolio.
James Baxter is a managing partner at Tideway Investment Partners
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