Unrest in the Middle East and North Africa has rattled investors’ nerves in the first few months of 2011. Of the leading international stock markets, the FTSE 100 has been particularly disappointing, falling by 1 per cent since January 1. Government bond prices are also under pressure.
So the opportunity to get a fixed rate of return from a bond issued by one of Britain’s most respected retail brands is not to be sniffed at. That is what the John Lewis Partnership Bond, issued this week, offers. However, it is not the only bond being targeted at private investors. But is it the best?
What is the John Lewis bond?
A corporate bond that enables private investors to invest directly in the department store, which also owns Waitrose.
The five-year John Lewis bond offers investors annual returns of 4.5 per cent in cash and 2 per cent in gift vouchers. Unless there is a disaster, investors will get their money back in full when the bond matures in 2016. It is available to anyone who held a Paternership credit card or a John Lewis account card on February 12 and is 18 or older. You can apply only once if you hold both cards.
Advertisement
What are its strengths?
Private investors do not often get the chance to buy bonds directly from blue-chip businesses. Because it is an employee-owned business and not a plc, you can’t even buy shares in the John Lewis Partnership.
The bond offers a better return than savings accounts or cash Isas. The return is subject to tax at your income tax rate, so is worth 5.2 per cent a year for a basic-rate tax payer and 3.9 per cent for a 40 per cent taxpayer.
And its weaknesses?
Investors should remember that this is not a low-risk savings account. Capital is at risk and corporate bonds are not protected by the Financial Services Compensation Scheme.
Advertisement
If John Lewis found itself in financial trouble, it could stop paying interest and if it went bust investors could lose their original investment. The marketing literature for the bond originally described it as a “stable home for your savings”. After criticism, this has been changed to: “If you are looking for a trusted home to invest in, the John Lewis Partnership Bond could be for you.”
Payment of part of the return as John Lewis vouchers is not much of an incentive if you don’t often shop at the store. However, if you already have a qualifying card, the chances are you are a fan.
How will it be taxed?
Both the cash interest and the vouchers are taxable, but all the tax will be deducted from the cash interest paid. On a £1,000 investment, after 20 per cent tax an investor will get £20 in vouchers a year and £32 in interest. If tax was deducted from the vouchers, it would have been £36 in interest and £16 in vouchers.
How much can I invest?
Advertisement
Between £1,000 and £10,000. The offer closes on April 11 or when £50 million is raised, whichever is sooner.
What are its prospects?
John Lewis, whose slogan is “never knowingly undersold”, is a hugely respected brand. Its management took a cautious view of the year ahead when announcing results this week. However, the partnership also reported a 20 per cent rise in pre-tax profits to £368 million for the year to January 29 on sales up 10.6 per cent to £8.2 billion. This means investors can feel reasonably certain that it will deliver on its payment pledge If interest rates rise sharply, a 6.5 per cent annual return may not look that special. But even at the height of the financial crisis, when banks and building societies were offering cracking savings rates, few accounts offered much more. On the downside, the bond cannot be held in an Isa where the returns would be tax-free. There is also no way of getting money out before the bond matures.
Two separate corporate bonds issued this week that can be put into an Isa and sold at any time — bear in mind that you may not get your original capital back if you sell before a bond matures — look a better bet. Lloyds TSB is offering 5.5 per cent a year and Provident Financial 7.5 per cent. Both have a five-and-a half-year term. Unfortunately, you can buy these bonds only through stockbrokers, who will no doubt charge you. (You can apply for John Lewis’s bond on its website.) Provident Financial’s business will not be to everyone’s taste as it sells doorstep loans at high rates of interest. However, if you can live with that, it seems unlikely that Provident Financial, or Lloyds, will go bust in the next five and a bit years.
For those interested in a fixed rate of return they are both worth a look, as is the London Stock Exchange’s retail bond market, where you may find bonds offering an even higher rate of return. Bear in mind that they are not risk-free.