Within the fixed income sphere, certain UK corporate bonds present a very interesting investment proposition, but investors must focus on careful selection to mitigate risk, according to Peter Hicks, executive director, UK Retail at Fidelity International.

Concerned investors have sought the comfort of government bonds, and this flight to the safety of sovereign guarantees has pushed gilt yields to very low levels. This has made gilts unattractive in Mr Hicks’ view, despite the security they offer, and he believes that additional risk associated with corporate bonds might be worth the price.

Mr Hicks said last November that corporate bonds offered a strong yield at an acceptable level of risk, if default risk was avoided by careful stockpicking. He still believes that this is the case.

While the past two years have taught investors to expect the unexpected, Mr Hicks points out that there are companies for which the prospect of default is remote. Such corporate bonds offer the certainty of capital gain if held to maturity and a very attractive yield until then, he says.

First among the corporate bonds favoured by Mr Hicks is a Tesco 5 per cent issue that matures in 2023. This is trading at 93 pence in the pound, with a redemption yield of 5.7 per cent.

Second, is a National Grid 5.875 per cent issue, maturing in 2024. At 97.3 pence, its redemption yield is 6.1 per cent.

Contrarian investors may also like to consider Royal Bank of Scotland, Mr Hicks says: its 6.934 per cent 2018 is priced on the floor at 68.1 pence and so yields a extremely attractive 13.2 per cent.

While Mr Hicks concedes that RBS is in distress, the bank has the UK government’s backing, along with a stated wish that it does not wish to take further equity in the company. As such, “the longer term stability of the bank looks more likely than it did at the beginning of the year,” he said.

Some asset allocators view bonds as the “new equity”, replacing stocks as the predominant asset class in growth portfolios, due to extreme valuations and stresses in many asset classes. Attitudes will normalise however as the financial turmoil subsides, Mr Hicks believes.

“More likely in the future is that as we find our way through the financial crisis, the yield spread between corporate and government bonds will return to more normal levels, at which point, any investors to have taken advantage of pricing anomalies now will have enjoyed healthy gains,” he said.