By Stacey Parsons, Head of Fixed Income Trading and Sales at Winterflood Securities
In a world of accelerating investor democratisation, the largest capital market of all, in terms of USD equivalent notional outstanding, is the Global Debt Market at $128.3trn, consisting of $40.9trn in corporate debt, according to ICMA in August 2020.
Despite this, debt markets remain strangely anchored in the past. While the retail investor has become resurgent in the equity markets, debt markets are generally still the preserve of the institutional investor.
If you consider the economic and market backdrop of the last 10 years, this becomes even more curious. In an environment of stubbornly low interest rates and rising prices, investors crave predictable returns– more synonymous with fixed income products than the traditionally more volatile equity, currency, or commodity markets.
Compare this against the backdrop of ‘fixed rate’ products available to the UK investor. The average one-year fixed rate cash ISA pays just 0.38% interest, according to Moneyfacts, with the most up-to-date figures from the ONS showing that the value of UK Cash ISAs stands at £316.2billion, representing over half of the value of ISA Investment in the UK.
Meanwhile, the lack of retail investor access to regulated premium grade corporate debt products since the introduction of regulatory changes, adopted under EU Prospectus and PRIIP Regulation, has steered unwitting investors into unregulated investment products such as non-transferable mini-bonds.
Locking out retail from regulated transferable debt markets, at time when investors are reaching for yield and returns, can have unintended, and sometimes catastrophic consequences for investors, as highlighted by the London and Capital Finance scandal in 2019.
Thousands of savers put their savings into high-risk mini-bond products following extensive advertising, particularly on social media. Around 11,500 bondholders put £237 million into London Capital & Finance after being promised returns of 6.5% to 8%, only for the company to fall into administration.
Regulatory changes, cheap financing and Covid recovery packages have created higher costs, increased complexities for issuers, forcing a legitimate reliance on distribution houses to deliver wholesale debt only issuance, thus cutting debt market access to the retail investor, or investors of under €100,000 – ‘the wholesale threshold.’
Issuers and distributors are now embedded in the wholesale trend of issuance as an easier and cheaper way of raising debt, a trend that looks set to remain unless something fundamentally changes.
To highlight this sea-change, in 2000, 90% of bonds brought to the European fixed income debt markets were listed with trading denominations of €/£1,000. Crucially, these low investment values made them accessible in secondary markets for retail investors and fund managers alike. Fast forward to 2018, and 90% of European fixed income debt markets in issuance are traded in denominations of €/£100,000. (Source ICMA)
Analysis shows that investors without direct access to individual fixed income alternatives are leaving their hard-earned money in cash and losing out on investment returns that can help ensure a higher quality of life in retirement. Research from consultants LCP shows that savers taking advantage of pension freedoms to cash out before their retirement have lost £2bn in investment returns.