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| Nuffield retail bond launches at 6% – but does it have a clean bill of health? | Nuffield retail bond launches at 6% – but does it have a clean bill of health? |
| (4 months later) | |
| Nuffield Health, which bills itself as the UK's "leading not-for-profit provider of health and wellbeing services", this week launched a bond paying 6% a year on deposits of as little as £1,000. | Nuffield Health, which bills itself as the UK's "leading not-for-profit provider of health and wellbeing services", this week launched a bond paying 6% a year on deposits of as little as £1,000. |
| The rate is more than double the interest paid on the current best-buy savings accounts, and is the latest in a string of issues from companies and organisations tapping into the public's thirst for better returns than those on offer at traditional banks and building societies. | The rate is more than double the interest paid on the current best-buy savings accounts, and is the latest in a string of issues from companies and organisations tapping into the public's thirst for better returns than those on offer at traditional banks and building societies. |
| Should savers pile in? Financial advisers polled by Guardian Money are not entirely convinced, with some arguing that savers are largely ignorant of the risks involved in retail bonds, while others say the word "bond" is itself misleading. | Should savers pile in? Financial advisers polled by Guardian Money are not entirely convinced, with some arguing that savers are largely ignorant of the risks involved in retail bonds, while others say the word "bond" is itself misleading. |
| The Nuffield bond's interest is fixed at 6% a year for five years, payable annually, on investments from £1,000 to £250,000. Nuffield is hoping to raise £15m, with a closing date of 18 June. It is offered on a first-come, first-served basis, so any subscriptions sent in once the £15m has been reached will be returned, even if they are arrive before 18 June. The money will be used to invest in Nuffield's hospitals, clinics and gyms (it bought the Cannons chain). | The Nuffield bond's interest is fixed at 6% a year for five years, payable annually, on investments from £1,000 to £250,000. Nuffield is hoping to raise £15m, with a closing date of 18 June. It is offered on a first-come, first-served basis, so any subscriptions sent in once the £15m has been reached will be returned, even if they are arrive before 18 June. The money will be used to invest in Nuffield's hospitals, clinics and gyms (it bought the Cannons chain). |
| The bond can't, however, be wrapped into a tax-free individual savings account. Instead, savers will have basic rate tax of 20% deducted from the interest payout at source. In other words, savers will receive 4.8% interest. If they are non-taxpayers, they can reclaim the tax, or if they are higher rate taxpayers they will have to declare the income and pay the balance – ie the rate will in effect be 3.6%. | The bond can't, however, be wrapped into a tax-free individual savings account. Instead, savers will have basic rate tax of 20% deducted from the interest payout at source. In other words, savers will receive 4.8% interest. If they are non-taxpayers, they can reclaim the tax, or if they are higher rate taxpayers they will have to declare the income and pay the balance – ie the rate will in effect be 3.6%. |
| But financial advisers caution against making direct comparisons with fixed-rate bond savings accounts. A retail bond such as the Nuffield Health Bond, and others before it, such as those from Tesco Bank, are in effect a loan to the business. If the business goes under, you lose most or all of your money – without any recourse to compensation schemes. | But financial advisers caution against making direct comparisons with fixed-rate bond savings accounts. A retail bond such as the Nuffield Health Bond, and others before it, such as those from Tesco Bank, are in effect a loan to the business. If the business goes under, you lose most or all of your money – without any recourse to compensation schemes. |
| The Nuffield Health Bond is not protected by the Financial Services Compensation Scheme, which provides cover of up to £85,000 on conventional deposit accounts. But the lack of FSCS protection hasn't stopped savers pouring millions of pounds in recent years into retail bonds. The London Stock Exchange's retail bond platform, Orb, began three years ago and has made it much simpler and easier for the general public to buy and sell bonds in companies. | The Nuffield Health Bond is not protected by the Financial Services Compensation Scheme, which provides cover of up to £85,000 on conventional deposit accounts. But the lack of FSCS protection hasn't stopped savers pouring millions of pounds in recent years into retail bonds. The London Stock Exchange's retail bond platform, Orb, began three years ago and has made it much simpler and easier for the general public to buy and sell bonds in companies. |
| Tesco's bond issues (from its banking subsidiary, not the supermarket) have been hugely popular. Last year it issued an eight-year bond paying 5% where the underlying price has already gone up from 100p to 109p (although that means anyone buying it in the "secondary" market will in effect receive a lower yield). Hargreaves Lansdown runs a dealing service for small investors, and has in the past promoted bonds paying 6% from Provident Financial and 6.125% from International Personal Finance. But it is keen to point out that neither the income nor capital is guaranteed, and that they can fall in value. | Tesco's bond issues (from its banking subsidiary, not the supermarket) have been hugely popular. Last year it issued an eight-year bond paying 5% where the underlying price has already gone up from 100p to 109p (although that means anyone buying it in the "secondary" market will in effect receive a lower yield). Hargreaves Lansdown runs a dealing service for small investors, and has in the past promoted bonds paying 6% from Provident Financial and 6.125% from International Personal Finance. But it is keen to point out that neither the income nor capital is guaranteed, and that they can fall in value. |
| Brian Dennehy of adviser Dennehy Weller & Co is more scathing. "A lot of these bonds appear opportunistic to us. They are not a safe, high-yield option. You are taking a lot of risk with a bond; often you are buying into a business you don't know, and where you have no idea where you stand if it goes bust. There's no safety net, and when one of these bonds goes bust, it will reflect badly on the entire financial services industry." | Brian Dennehy of adviser Dennehy Weller & Co is more scathing. "A lot of these bonds appear opportunistic to us. They are not a safe, high-yield option. You are taking a lot of risk with a bond; often you are buying into a business you don't know, and where you have no idea where you stand if it goes bust. There's no safety net, and when one of these bonds goes bust, it will reflect badly on the entire financial services industry." |
| Evidence of just how risky bonds can be came last week from Co-operative Bank, whose bonds plummeted after a severe downgrade from rating agency Moody's. The price of one Co-op bond fell from around 150p to 90p, leaving holders with losses of around 40% of their capital. | Evidence of just how risky bonds can be came last week from Co-operative Bank, whose bonds plummeted after a severe downgrade from rating agency Moody's. The price of one Co-op bond fell from around 150p to 90p, leaving holders with losses of around 40% of their capital. |
| The Nuffield Health bond worries advisers more than some other bonds, such as the one from Tesco Bank, because it will not be traded on the London Stock Exchange. Investors will have to lock up their money for five years and rely upon Nuffield still being there to return the deposit. Early redemptions are not allowed. | The Nuffield Health bond worries advisers more than some other bonds, such as the one from Tesco Bank, because it will not be traded on the London Stock Exchange. Investors will have to lock up their money for five years and rely upon Nuffield still being there to return the deposit. Early redemptions are not allowed. |
| Kevin Doran, senior fund manager at private bank Brown Shipley, says: "The Nuffield issue underlines the importance of investors understanding what they are buying because there are important differences between this and some of the recent retail bond launches. | Kevin Doran, senior fund manager at private bank Brown Shipley, says: "The Nuffield issue underlines the importance of investors understanding what they are buying because there are important differences between this and some of the recent retail bond launches. |
| "The Nuffield Health bond won't be listed on the London Stock Exchange, where retail investors can trade bonds in a similar way to equities, and that means there will be no secondary market and no pricing once the issue goes live. | "The Nuffield Health bond won't be listed on the London Stock Exchange, where retail investors can trade bonds in a similar way to equities, and that means there will be no secondary market and no pricing once the issue goes live. |
| "Investors have to ask themselves whether they think a yield of 6% from a not-for-profit organisation running hospitals and health clubs is sufficient. They should also consider whether they want to tie their money up for five years at that yield." | "Investors have to ask themselves whether they think a yield of 6% from a not-for-profit organisation running hospitals and health clubs is sufficient. They should also consider whether they want to tie their money up for five years at that yield." |
| He describes Nuffield's balance sheet as "not the best in the world", and says that although it had a turnover last year of £645m and fixed assets of £523m, it only managed to achieve a pre-tax profit of £4m. However, Nuffield says its turnover was up 12% on the year before, and return on capital employed rose to 15.7%. | He describes Nuffield's balance sheet as "not the best in the world", and says that although it had a turnover last year of £645m and fixed assets of £523m, it only managed to achieve a pre-tax profit of £4m. However, Nuffield says its turnover was up 12% on the year before, and return on capital employed rose to 15.7%. |
| But for advisers who aren't keen on the Nuffield bond, what are the alternatives? The yield (interest rate) on many of the bonds of utility companies and multinationals traded on the LSE have fallen steeply in recent years and many are offering only 4% or less. | But for advisers who aren't keen on the Nuffield bond, what are the alternatives? The yield (interest rate) on many of the bonds of utility companies and multinationals traded on the LSE have fallen steeply in recent years and many are offering only 4% or less. |
| At Brown Shipley, Doran rates less well-known companies such as Workspace, Unite and Enquest, which yield around 5%, but are backed by real assets such as property, or, in Enquest's case, oil flows. | At Brown Shipley, Doran rates less well-known companies such as Workspace, Unite and Enquest, which yield around 5%, but are backed by real assets such as property, or, in Enquest's case, oil flows. |
| Investors should also be careful to understand how tradeable bonds work. If you buy at the outset, the bond will pay the fixed amount of interest (usually known as the "coupon") and repay the capital at maturity. They are normally launched at 100p a unit, but along the way, as they are traded, their price may rise or fall. If you buy at a price of more than 100p and hold to maturity, then you are, in effect, guaranteeing that you will be losing some of your capital, although you may be happy with that if you also receive a high coupon. | Investors should also be careful to understand how tradeable bonds work. If you buy at the outset, the bond will pay the fixed amount of interest (usually known as the "coupon") and repay the capital at maturity. They are normally launched at 100p a unit, but along the way, as they are traded, their price may rise or fall. If you buy at a price of more than 100p and hold to maturity, then you are, in effect, guaranteeing that you will be losing some of your capital, although you may be happy with that if you also receive a high coupon. |
| When investing, it is always worth comparing the "running yield", which is a snapshot of the current price of the bond compared with the interest paid, and the "gross redemption yield", which shows you how much you'll earn if you hold it to maturity. | When investing, it is always worth comparing the "running yield", which is a snapshot of the current price of the bond compared with the interest paid, and the "gross redemption yield", which shows you how much you'll earn if you hold it to maturity. |
| For more information on the Nuffield bond, go to nuffieldhealthbond.com or call 0871 664 9236. | For more information on the Nuffield bond, go to nuffieldhealthbond.com or call 0871 664 9236. |
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