Bonds are supposed to be less trouble than shares – barring disaster, you know what return you will get from them if held to maturity – and so it has proved with our Income Portfolio. In the five years or more of the portfolio’s existence, only one of our bond holdings (Premier Oil) has worried us enough to prompt a sale; the others have just carried on quietly producing the income their issuers are contractually required to pay.
Now however we need to make another change – not because of any unwelcome development with a bond holding but simply because one of them, the Paragon 6.125pc issue, is about to mature. Investors will get their money back on or shortly after Jan 30.
Or, to be strictly accurate, some, Questor included, will get most of their money back. We did not invest when the bond was issued, which was in 2014, but instead bought on the open market in January 2017, when the bonds were trading at more than “par” value. So from the outset, we were guaranteed a capital loss if we held to maturity.
It may sound odd to buy an investment certain to lose capital value but, of course, that is to look at only half the story: that loss is more than made up for by the income. We paid £104.60 for the bonds and will receive par value of £100, so our capital loss is 4.4pc; our income, meanwhile, is £6.12½ a year per bond, or £5.85½ per £100 invested – 5.9pc more or less.