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A coda to my mini-bond confession

Warning: Mini-bonds are dangerous to your wealth

The 1990s ‘Lads’ mag’ Loaded1 had a section called Getting Away With It. From memory it comprised photos of the magazine’s titular lads in-country, stumbling over bikini-clad glamour models at press events, or driving a rented Lamborghini into a wall.

Consider this post on mini-bonds in that spirit.

I obviously shouldn’t have gone near mini-bonds. And I don’t just say that with hindsight.

But I got away with it.

Definitely Maybe

In an article in June 2009 entitled Why I’d avoid these unlisted bonds like the plague, I pointed out the problems with these new-fangled mini-bonds.

Scant documentation, unsophisticated buyers, illiquidity, and more.

I wrote:

What would trouble me is if [this early issue] started a craze for unlisted bonds.

One company doing a one-off deal for headlines is one thing, but dozens of companies raising money direct from an always-credulous public would surely end in tears.

I then did what I often do around here, which is the opposite of what I suggest you do.

There’s a reason my doughty co-blogger The Accumulator was brought in to shoulder the passive investing duties years ago. I’m the investing equivalent of a cardiologist who smokes 60 a day.

I began to put money into mini-bonds.

Different Class

Apologies if you just choked on your lockdown lunchtime chardonnay, but this is not a new revelation.

I confessed to my mini-bond portfolio in September 2016.

It was only about 1% of my total net worth. Enough for a nice holiday or two at that point, but not life plan-threatening.

I hadn’t changed my mind about these investments. I didn’t believe mini-bonds had become a stunning opportunity.

On the contrary, I said they could be cynically described as:

…the junkiest of junk bonds – pseudo-corporate bonds issued by companies so risky that professional investors wouldn’t touch them with a barge pole taped to a barge pole.

But I was not quite so cynical, and I had my own reasons for investing in them.

Read that post if you want to know more about mini-bonds – and why and how I assembled my portfolio.

Anyway, the last of my mini-bonds matured in March 2020. This rest of today’s post just signs off this chapter of my investing antics.

(What’s the Story?) Morning Glory

I won’t name the specific mini-bonds I bought.

Last time I didn’t want to be seen to endorse any of these risky and illiquid issues. This time I think the names are too distracting from the big picture.

Here’s a snapshot though of my portfolio in abstract terms:

Company / sector Yield
Fast casual dining 8%
Coffee chain 8%
Property firm 7.5%
Speciality coffee chain 8%
Craft brewer 6.5%
Fast casual dining 8%
Coffee chain (2x position) 11%
Speciality food retailer 8%
Energy infrastructure 8%
Property firm (5x position) 10%
Average 8.9%

Source: My off-spreadsheet records

As you can see, the high yield was the main draw – even back in 2016, before most people had heard of negative interest rates.

You also got also free coffees, brunches, and various other perks with many of the bonds.

Finally, there was the main reason I did it – for kicks and for experience.

I enjoyed meeting management at special events before investing. I believe I rejected a couple of bonds this way, too.

These meetings also whet my appetite for investing in unlisted equities via crowdfunding. More on that skeleton in the cupboard another day.

So how did my mini-bonds fare?

It’s Great When You’re Straight… Yeah

The majority of the mini-bonds ran for four years before you got the option to rollover for a year or redeem your investment.

In every case I redeemed where I could.

But I couldn’t always redeem as planned!

Firstly, the mini-bonds in the coffee chain where I took ‘two helpings’ – that paid a stonking 11% – were redeemed early. These were in a (fabulous) Australian chain called Daisy Green. I wrote about their redemption here.

There was no problem at Daisy Green. Indeed that was the problem if you were a mini-bond holder.

The company was doing really well! But rather than being rewarded for this as a bondholder, you got refinanced out of the picture and the equity owners enjoyed the future upside.

This brought home something I knew in theory but had never quite experienced in practice: bonds are for pessimists, shares are for optimists.

(Daisy Green did offer former bondholders and others the opportunity to buy its shares at a later date. Perhaps it was inspired by my moaning.)

I was frustrated to lose that lovely 11% yield. But that was far better than what happened at the other mini-bond I was unable to redeem.

The bond – in a ‘speciality food retailer’, with an 8% yield – went bust!

I got a couple of years income before it went to the great graveyard of failed dreams in the sky, but it still represented a more than 80% loss on a single investment.

The beauty of starting with a high portfolio yield though is that the income you earn covers over a lot of pain.

My bust-bond represented 1/15th of my mini-bond portfolio. So even its total wipeout was covered by the annual interest from the rest of the portfolio.

However it clearly did have the affect of bringing down the overall yield I enjoyed from this experiment – as did of course the early redemption.

As I stated in my 2016 post I was fully prepared for one or two bonds to go bust.

Still annoying though, especially given the limited upside for taking this risk.

The Great Escape

At this point a nerdier more committed blogger would tot up all the income they received from their mini-bonds, account for the loss, and figure out the overall return from this foray into foolishness.

Where is The Details Man when you need him, eh?2

I’m too old and running out of time to bother doing that. All the bonds that lasted for the duration started and ended at different dates. It’d also be non-trivial deciding how to treat the reinvestment of the coupons.

My mini-bond portfolio was mostly for fun. Bond and return maths is not fun!

The return I got (I’d guesstimate around 7%) was okay, but I don’t need a decimal point in a spreadsheet to tell me I probably would have been better off in a global tracker fund – let alone my own actively-run portfolio (which I have unitized and track to the very last penny).

Besides, four years is nothing in statistical terms. If stock markets had slumped for a few years from 2016 then maybe this mini-bond lark would have looked superficially savvy.

But that brings me to the final point – which is that I owe my brush with mini-bond success to a fair dollop of luck.

Because several of my mini-bonds would have suffered in the coronavirus era. And I know at least one of my former investments has gone bust!

Roll the start of my experiment along by just one year – or see somebody getting intimate with a bat in Wuhan a year earlier – and my results would have been far less satisfactory.

Plenty of people have seen their mini-bonds fail, even without a miserable global pandemic to finish them off. Many bust mini-bonds were dubious-looking financial issues that I wouldn’t ever have touched… but not all of them.

I Should Coco

We are never likely to get useful long run mini-bond data over many economic cycles.

Mini-bonds, at least in their UK incarnation, were a product of their time. A moment fostered by low interest rates, a temporary scarcity of bank funding for small businesses, and new Internet-enabled platforms that could market the mini-bonds effectively and cheaply to a wide audience.

However the Financial Conduct Authority permanently banned marketing mini-bonds to retail investors in June 2020.

I qualify as a sophisticated investor, and I could invest again in mini-bonds if I wanted to.

But I’m sufficiently sophisticated to know I shouldn’t!

The best takeaway from this investment fad was probably the fancy coffee.

  1. A genuinely innovative magazine, if a creature of its time. Far more so than its insipid rival, Maxim, which did the dirty without even a hint of a knowing wink. []
  2. Back at work is where – boo! []
{ 9 comments… add one }
  • 1 ermine November 19, 2020, 5:39 pm

    There’s always a certain deliciousness in getting away with something when you know you shouldn’t 😉

    You were indeed lucky to get out before this year!

  • 2 Neverland November 19, 2020, 8:09 pm

    Investing in mini-bonds is like making love to a beautiful woman, initially enjoyable but you know it won’t lead to a lasting and satisfying relationship

    Swiss Toni, 2004

  • 3 Gentleman's Family Finances November 19, 2020, 9:36 pm

    Great read and good to halve perspective on an area of finance that is.mainly covered in sob stories in the press like “I lost my £300,000 pension when carpark bonds turned out to be a scam”

    I’ve personally invested in P2P for about 15 years and the overall result has been a fair gain, but an expensive education.
    I mainly invest on P2P with Abundance on green projects and like that a lot. (www.abundanceinvestment.com) but the truth is that the upside is limited and the downside can be total.
    Many of the mini bonds I’ve seen are clearly too good to be true and no surprise many have stolen investors money through premeditated fraud which is why I have gone for the more ethical end of the market or at least altruistic.
    Finally, like you I have been touting ratesetter as somewhere to invest and friends of ours did invest and now can’t get their money back (no losses yet but they need the money and can’t get it). It’s not good to have then sort of blame me for my endorsement of a bad deal for them.

  • 4 WJD November 19, 2020, 10:11 pm

    Freetrade will be launching a SIPP account as of 6 December 2020. One can pre-register interest.

  • 5 BerkshirePat November 19, 2020, 11:05 pm

    I have a bit in Ratesetter (an IFISA), based on coverage here.
    It’s ‘only’ about 5% of my total net worth, and of that 5% I’ve only got just over half of it on loan, the rest is in the ringfenced holding account so safe (theoretically)
    I’m not *too* worried, as I don’t need the cash anytime soon and their capital coverage ratio is still >>100%
    The interest rate 50% haircut was annoying but I can see the point, and in these zero return times >2% tax free is still Ok to me
    You can laugh at me if it all goes horribly wrong, but I have bigger problems at the moment !!

  • 6 Matthew November 20, 2020, 10:29 pm

    You could buy up timeshares and reassemble them into complete saleable properties…
    What experience were you hoping to gain, @ti?
    I wonder if there are some totally exploitable perks that pay for themselves… I can imagine too that the perk system means you’re not going to see many dull things in the offering, like paperclips Inc or drain cleaning

    I’d want to know why the business was borrowing at a high rate… And I too don’t see why you’d put your risk into a limited upside bond where you can’t even resell it if base rates drop so you don’t even get that upside. I think in a way the gains from shares leave you in a safer place in the long run.

    Maybe ratesetter lenders to corporates need to persue their free coffees & brunches!

  • 7 Gareth Harries November 21, 2020, 12:23 am

    Great article
    I looked at these when they came out and thought I could get my fingers burnt. Whenever there is a new Kid on the block promising the most fantastic returns, I always treat it with utmost scepticism. Doesn’t just apply to mini-bonds but also P2P etc.. Yes I recognise that some people manage to get in and out of these without harm, but that is probably more down to luck than judgement, although most won’t probably admit to that? And sometimes they prove to be a good route. I prefer to base my decisions on the basis of history i.e. that the stock market beats all other investments. Don’t get me started on buy-to-rent, before they pile in, you only hear the success stories and not the many failures due to non-payment of rent, tenants wrecking properties etc.

    Whilst I’m not an advocate of trackers myself and have found that I can get success by selecting active funds, although I got burnt by the Woodford mess, but I had received good returns since 1993 from him, the Barclays study shows that Shares beat Fixed instruments over the long term. Yes there are some bad periods, but there always are. I will go with the odds that I probably have a better than 80% chance of outliving my portfolio and can always adjust my spending pattern as I get older and I still have the Old age Pension begin in 3 years time, which combined with my wife’s will contribute over another £10k per annum on a an income that already is one that most people would like to have.

    So don’t gamble and follow the odds

  • 8 Kid Cocoa November 21, 2020, 10:23 am

    note to self – when you get tired of dull and boring investments, remind self never get tired of dull and boring investments.
    I could never get my head around those ‘Burrito Bonds’. Thankfully. Plenty of other ‘next best investments’ over the years have grabbed my attention though, but they’ve only managed to get hold of the fun money, so far.
    Now, where’s that Bitcoin prospectus?

  • 9 The Rhino November 21, 2020, 12:42 pm

    Good article but even better section headings, I’m firing up Spotify now to listen to them all. Everyone’s got their golden era and that is absolutely slap bang in the middle of mine!

    I second missing the details man. Can he make a come back? Obvious subject for his forensic treatment is tax returns (Irish ETFs anyone?), we’re getting to that time of the year again unfortunately…

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