By 
Questor Income Portfolio: stocks may have been hammered by the uncertainty but bonds work to different rules, providing welcome ballast to our portfolio
The recent progress of the two Income Portfolio holdings about which we update readers today illustrates perfectly why cautious investors tend to hold plenty of bonds.
We covered Premier Oil’s 2021 retail bonds on June 7, when their price stood at £101.75 and they closed last night at £101.38. In other words, despite all the turmoil in Britain and elsewhere over the summer, the price has hardly moved.
Contrast that with OneSavings Bank, which we wrote about just a week earlier. At that time its shares were changing hands for 407.4p but last night they were 23pc cheaper at 313.6p. They lost 4.4pc yesterday alone.
Both companies have announced results since we last covered them, but in neither case did anything unexpected emerge. This column can see no other reason for the severe fall in OneSavings Bank’s shares than the severe Brexit-induced pessimism towards the London stock market, and domestically focused businesses in particular, that has afflicted investors.
That pessimism does not generally extend to corporate bonds, however, because all that matters for bondholders is that the issuer remains a going concern and is able to meet its commitments in relation to interest and repayment at maturity.
Certainly Premier Oil’s bonds seem no less safe an investment now as a result of our fixation with Britain’s withdrawal from the EU and the damage that a no-deal exit is predicted to cause to the domestic economy.
The company is of course more exposed to developments in the international oil market than to anything that happens here. Brexit can even be said to help its finances because its oil is priced in dollars and a weak pound boosts the sterling value of its dollar income to the extent that the exposure is unhedged.
In fact, this column is far more interested in Premier’s debt position than in the effects of Britain’s political crisis. In this respect the interim results, announced last week, had only good news: net debt fell by $180m (£147m) to $2.15bn and the company said it expected a reduction of $300m over the full year, excluding the proceeds of any potential disposals.
OneSavings, meanwhile, said in its own interim report that profits before tax were broadly flat at £91m, while “underlying” pre-tax profits rose by 6pc to £96.9m. Returns on equity and capital reserves were strong and the interim dividend was raised by 14pc to 4.9p per share.
Should the full-year divi be increased by the same percentage it would be about 16.65p, which would represent a yield of 5.3pc at the current share price.
We will retain both holdings in the portfolio but note that the bond’s superior ability to retain its value in times of stress makes it the obvious candidate of the two for sale should any readers need to sell some assets from the portfolio to raise cash.
Questor says: hold
Ticker: PMO1, OSB
Bond/share price at close: £101.38, 313.6p
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Update: Paragon Bank 2022 bonds
Last month we published an update on this portfolio’s three bank (or building society) bonds, one of which was issued by Paragon Bank. Our article said the Paragon bonds were due to be redeemed on Dec 5 2020.
A sharp-eyed reader got in touch to say that the Paragon bonds we had actually added to the portfolio on Jan 20 2017 were not due to be repaid until the end of January 2022 – roughly 14 months later than we said.
The reader was right and this column had muddled up two of Paragon’s bond issues, for which we apologise to all readers. The bonds we do own, whose ticker is PAG2, remain a hold.
Questor says: hold
Ticker: PAG2
Bond price at close: £104.88
- Read Questor’s rules of investment before you follow our tips
Update: Manchester Building Society Pibs
These bond-like instruments are not in our portfolio but we have been keeping readers informed about them. The society announced interim results yesterday and said interest on its Pibs due in October was “unlikely” to be paid.
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
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