There was a time when buying corporate bonds was only for the likes of big investment funds because of the prohibitively high cost involved. In this WiseAlpha review, we look at how they have made investment grade and high yield bonds accessible to the wider investment community by lowering the barrier to ownership.
While this sounds great, if you’re reading this you will no doubt want to know specific details about the risks, benefits, fees and the organisation behind WiseAlpha before deciding whether or not to place your hard-earned money into an investment with them.
This review is based on my own opinions of using the WiseAlpha site as a customer and our company does not have a financial relationship with them.
What is WiseAlpha?
WiseAlpha is a self-service website that facilitates the trading of corporate bonds. It has opened this asset class up to the mass market by making bonds affordable to investors.
The high-cost barrier of corporate bonds meant that they have traditionally been accessible to organisations such as funds (pension, hedge, sovereign wealth) and insurance companies. Only individual investors with enough financial clout to meet the minimum of £100,000 denomination sizes could have afforded to buy bonds.
The way that WiseAlpha makes bonds affordable to individuals is done in an innovative way. They purchase bonds from various banks, then split these into much smaller chunks and make them available via their website platform. Individual investors can then purchase a ‘contract note’ which is linked to the bond’s performance.
I have taken a good, hard look at the platform & how it works and will address the important questions. To begin, here is a summary outlining the headline points:
|Company||WiseAlpha Technologies Limited, founded 2014|
|Bonds available||High Yield, Investment Grade|
|Authorised & regulated by||Financial Conduct Authority|
|Minimum investment size||£100 / €100|
|Management fee||Tiered, with a maximum 1% of the portfolio value (annually)|
|Headquarters||Canary Wharf, London|
|Support||Email, Telephone, Live chat|
Next as part of this review of WiseAlpha is an overview of bonds and how they work. If you’re already familiar with corporate bonds, you may want to skip over the next section.
What is a Corporate Bond?
A corporate bond is an interest-bearing debt instrument or obligation, usually issued by a public corporation. The bonds are issued for use for a variety of uses ranging from the financing of acquisitions, funding investment projects and/or for general corporate purposes.
Bonds range in size, typically from €100m to €1bn for single tranches, although many larger corporates issue corporate bonds at any one time for up to the value of several billion. Because the corporate bond is a debt instrument (similar to a mortgage for individuals), it pays the holder (buyer) an interest rate also known as the coupon rate.
At the other end of the spectrum, government-issued or ‘gilt-edged’ bonds are generally viewed as being the least risky ‘bond’ investment, given that they are backed by a sovereign state. These are not available through the WiseAlpha platform and the coupon rates provided by them are very low.
How Corporate Bonds Work
The corporation benefits from the bond investment and generates income from it, so it pays the bondholder a rate of interest. These interest payments are usually made every six months, although sometimes they can be paid quarterly or annually.
That interest cost/rate is benchmarked off the risk-free rate (government bonds) and is dependent upon the credit quality or worthiness of the said corporate.
In most cases, the corporate bond has a fixed maturity. This usually ranges from one to five years from the date of issue, but it is not uncommon for them to have longer maturities – typically up to 30 years. Occasionally, some borrowers have even issued bonds with 100-year maturities (e.g. Disney, Coca-Cola) although they usually have an option to redeem (partially or fully repay) the bonds long before the scheduled maturity.
Corporate bonds are ranked in terms of their quality. In their most basic form, they are ranked as either being investment grade quality or of high yield quality. In the US, high yield bonds are also sometimes referred to as junk bonds (an unfair term in my opinion, by the way). The public ratings are assigned by rating agencies, independent assessors of a company’s intrinsic ability to service their debt obligations. The large rating agencies are Moody’s, S&P and Fitch.
Investment Grade Bonds
The ratings scale for investment grade corporates is as follows (ranked left to right as being least risky to most risky):
- AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB- for S&P/Fitch scale, or
- AAA, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3 for the Moody’s scale
A corporate rated AAA (‘triple-A’, in the jargon) will be assessed as having the best ability to repay its obligation, while one ranked BBB– (‘triple-B minus’) is ranked as being the weakest in the investment grade category.
Over time, ratings can move up or down, usually by one notch (rating) but that can be more if, for example, a weaker rated company is acquired by a much stronger one such that the overall credit quality of the combined entity improves – or moves to the level of the acquirer.
High Yield Bonds
A company whose creditworthiness deteriorates (leveraged acquisition-driven or poor business performance) could eventually see its credit rating fall. A weak investment grade company – perhaps rated BBB-/Baa3/BBB- (S&P/Moody’s/Fitch) – could fall into the high yield category.
The high yield category of ratings is as such from Moody’s, S&P and Fitch (ranked left to right as being least risky to most risky):
- BB+, BB, BB-, B+, B, B-, CCC, CC, C, D for the S&P/Fitch scale or
- Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, Ca, C from Moody’s
The lower the rating, the greater the vulnerability of the interest payment. It, therefore, goes without saying that the lower the credit rating, the higher the probability of default also. That is an important consideration because investors can be attracted to the high interest payments offered by some companies – which might be household names – without being aware of the embedded risks to their investment.
Both investment grade and high yield bonds are available on WiseAlpha.
Who Issues Corporate Bonds and Why?
Historically, corporate bonds have tended to be issued by well-established, publicly listed companies with valuations exceeding say €1bn. However, in recent years, lower policy and market interest rates following the great financial crisis in 2008 have led to massive corporate funding disintermediation. As a result, there has been a shift away from the traditional over-reliance on banks to the capital markets.
Institutional investor demand for higher-yielding debt securities has seen massive growth in the high yield market – typically corporates with smaller market capitalisations (less than €1bn). For example, the high yield market’s size ballooned from around just €50bn in 2008 to over €350bn in 2020. By way of comparison, the investment grade market grew from €900bn to €2.5trn in the corresponding period.
The range of companies that might fund their activities through the corporate bond market is vast. Travel, leisure, telecommunications, utilities (state-owned or otherwise), healthcare groups, the whole gamut of industrial entities taking in automakers (as well as their suppliers, steel and miners) for example, and that is just scratching the surface of borrowers.
Issuing corporate bonds gives the corporate borrower another source of funding for its operational activities as opposed to, say, raising fresh cash through issuing more equity or equity-like instruments (hybrid bonds, for example) or loans from banks. Financial flexibility is an important tool for balance sheet management.
The issuance of corporate bonds is also used to shore up balance sheet cash buffers. That move can be seen as defensive or proactive ahead of a potential major investment or M&A activity. It can be opportunistic in the sense that ‘cheap’ money can be used to provide support for balance sheet strength and bolster credit ratings. That will be an important consideration in terms of reducing the impact of any financial market/macroeconomic stress.
Reasons to Buy Corporate Bonds
There are many reasons why buying corporate bonds is a worthwhile investment and ought to be considered as part of any diversified investment strategy. They vary depending on the type of investor but generally they:
- Offer a fairly dependable and diverse income stream. This might be important as part of an investment strategy for investors looking for steady income while preserving their principal, although the latter can depend on the level of risk that they are willing to take.
- The income/yield can be attractive versus the lower, less risky rate. That is, as a fixed income investment the higher yields for a relatively ‘safe’ investment make corporate bonds an appealing alternative. There is also the potential for capital appreciation, although it is less likely.
- They are fairly safe, but investors can take on high levels of risk for higher returns. The specific corporate bond rating assigned to most securities (not all) can be used as a guide as to the relative ability for the entity to service its obligation. Usually, the higher the rating (implied level of safety) the lower the return or coupon.
- Corporate bonds can be sold before their final maturity date. They do not have to be held to maturity. There is, under normal functioning market conditions, a liquid secondary trading market that depends on there being a willing buyer. Selling bonds before maturity might incur a capital loss or gain.
Like almost all investment vehicles, corporate bonds carry an element of risk. As you will see, the warnings are writ large that if you buy them you could lose all of your money. That’s not to say, though, that it’s very likely that you will.
The long-term default rate of European high yield bonds since 2002 is 3.1%, according to Standard & Poor’s. Choosing bonds that are in line with your risk appetite is therefore worth researching and for high yield bonds, imperative.
As highlighted in the ‘How corporate bonds work’ section, most corporate bonds are rated, independently by the rating agencies. They are assigned a credit rating corresponding to their opinion of the associated risks of default. The lower the rating, the higher the return but the higher the risk of a credit event (possible default).
Most bond prospectuses are made available on the WiseAlpha site, so the pertinent issuer information is there for the reading. Many of the bonds listed are household names, too, which provides some comfort in aiding the understanding of what each company does and how it operates.
Diversifying a bond portfolio can be easily done, either using the Robowise tool (see below) or by manual selection. I generally prefer to do things the manual way, mainly because I am interested in researching each issue and a bit picky about the process.
Bonds vs P2P Lending Investment
High yield corporate bonds could be considered a far less risky investment when compared with Peer-to-Peer loans. The main reason for this is the sheer size of the lender and information transparency instead of a similar product from a much riskier small company.
Returns for both of these are not too dissimilar, and so it depends on individual investor risk appetites as to which will be more appealing. I’d feel much safer with a brand name over a startup, for example. However, historically, it has been difficult to buy corporate bonds but it is now made possible by operations such as WiseAlpha.
WiseAlpha Review: Types of Bonds Available
The contract or participation “notes” that WiseAlpha issues are also known as “fractional” bonds which investors become the registered owners of. You can buy each fractional bond in a minimum amount of £100 or €100 and in increments of a penny thereafter (e.g.. £100.01 if you wanted to).
There are two main types that can be purchased on the platform, Secured and Unsecured. Let’s take a brief overview of the differences between these types of high yield bonds, the risk associated with each and how they might affect your decision to invest in them.
Bond Security Categories
Within the bond universe, there is the possibility to issue debt with differing classifications, much in the same way as equity markets do. For instance, in the equity markets there is common equity (the vast majority of the issued stock) which ranks behind preferred shareholders in the case of a company wind-up.
There are several types of corporate bond securities. They rank, in order of seniority and prioritised debt payouts:
- Unsecured, then
- Junior subordinated (or junior unsecured)
There are other categories such as guaranteed bonds and convertible bonds but they are not relevant here for WiseAlpha.
Secured bonds therefore stand near the front of the queue and will be one of the first to receive a payout if a company defaults (is wound up), after any preferential creditors are paid. These are bonds that will be collateralised on a specific asset which is usually worth more than the size of the bond issue. Once these holders are paid out, next in line will be senior unsecured holders.
Next in the pecking order is the unsecured bond. This type of security is close to the front of the line when it comes to a wind-up, but there is no collaterisation of assets backing the issue. They get what’s left over. Most of the corporate bond market sits within this category of debt issuance.
The Secondary Market – Is there Liquidity on WiseAlpha?
You can sell fractional bonds on WiseAlpha site, but there are no guarantees of when and if they’ll be sold. This market is nowhere near as liquid as the stock market and others, so you should be prepared to wait, in extremis. There is liquidity on WiseAlpha but that is affected by market conditions and in times of stress, the risks are for exaggerated price movements (lower).
Although secondary trading in corporate bonds (the ability to buy or sell a holding) can be more difficult compared with equities markets, WiseAlpha state on their website that everyone who has wanted to sell have been able to.
Should you put a bond up for sale, it will become visible to others using the platform. You also continue to earn interest while the bond is held for sale. Because they have thousands of investors looking at the market (including some who will have been recently paid their latest coupon payment who have excess funds to reinvest), there could well be buyers lying in wait.
That said, the market has tended to a more buy-and-hold dynamic over the past few years – where investors buy and hold the security to maturity and receive an interest payment every six months. At maturity, they receive their capital back.
On the WiseAlpha platform, you can create a sell order by clicking the “Sell” button and that amount that you wish to put up for sale. Unless you decide to cancel your sell order, it will execute as soon as another WiseAlpha customer puts in a new sell order for the same fractional bond.
It might be that the sell order is executed in chunks until it’s fully completed, depending on the size of the corresponding buy orders.
Where Do I Stand if WiseAlpha Goes Under?
After making a transaction, you don’t own the bond directly. WiseAlpha plc does. They are buying a note in these fractional bonds, so you’ll want to know what happens if something goes awry.
Your funds will actually be held in trust with a segregated account with London-based GCEN, (Global Custodial Services Limited) an FCA authorised and regulated company (FCA FRN 595875). For what it’s worth, GCEN has been in existence since 2003 and they have earned an “Excellent” Trustpilot rating.
Thus, your funds that are used to pay for each bond are locked away where WiseAlpha can’t touch it until either the bond reaches maturity or you decide to sell it early.
This protection is explained in full on the WiseAlpha blog:
Are WiseAlpha Investments FSCS Protected?
For UK-based investors, the government’s Financial Services Compensation Scheme provides protection of up to £85,000 per financial products if their provider goes bust. This includes pensions, bank accounts, mortgages and insurance as well as some investments.
At the time of writing, the Fractional Bonds bought via WiseAlpha are not eligible for the FSCS protection scheme, even though the company is FCA regulated.
Who Can Use WiseAlpha?
Diversifying a portfolio by adding corporate bonds that you can choose yourself provides an interesting alternative to more traditional investments. Many of us already hold shares, peer-to-peer investments and perhaps even corporate bond fund ETFs. It won’t suit everyone’s investment strategy, but for those who like the idea of receiving steady returns at a predetermined rate of interest, this will be a boon. So, who is able to take advantage of it?
It makes sense to be either from the UK or the EU (or hold funds in these regions), as those are the currency denominations of the bonds on offer. To qualify to use the platform you must be a suitable investor, and will need to self-certify as one of the following:
- High Net Worth Investor
- Self-Certified Sophisticated
- Investment Professional
- Advised or Institutional Investors
High Net Worth Investor
For these purposes, a high net worth individual is defined as someone who:
- had at least £100,000 annual income in the previous financial year and/or
- held at least £250,000 in net assets in the previous financial year. The definition of net assets excludes property which is your primary residence.
You fall under this category of investor if you:
- are currently (or have been in the last 2 years) a director of a company with at least £1 million in turnover or
- work (or have worked in the past two years) as a professional in the private equity sector
- work (or have done in the past two years) in the provision of finance for SMEs in a professional capacity or
- are a business angel; i.e. have made more than one investment in an unlisted company in the last two years or
- have experience with illiquid investments. Such illiquid investments might include peer to peer lending or equity crowdfunding
In the main, investors generally buy and hold corporate bonds rather than frequently trading them based on price movements, so it’s important that investors fully appreciate this.
If you have professional investment experience or are authorised by the Financial Conduct Authority (FCA), you’re classed as an Investment Professional who is also suitable to use WiseAlpha. The FCA’s Financial Services Register can be searched here. Institutions (e.g. companies) that are set up as legal entities to manage investments for the entity are also qualified investors for the purposes of using WiseAlpha.
This is an individual who has taken advice from an FCA authorised advisor in relation to a WiseAlpha investment.
This is a person (or people) who will manage investment/s with WiseAlpha for a legal entity (institution).
In addition to making the above declaration, platform users will also need to answer a set of questions and pass the WiseAlpha questionnaire. This multiple-choice test is designed to ensure that only investors who understand all of the risks associated with corporate bonds can get access to the system.
You will only have a set number of attempts to answer the questions correctly, so make sure that you are well prepared and up to speed with your knowledge of the corporate bond market. The quiz is not something that will overly tax the brains of most people who are familiar with the subject matter.
The service fee structure on WiseAlpha.com is relatively straightforward. You only pay fees when your interest payments are received, which equates to no up-front additional costs.
There are no other hidden charges, either, which means that all of the admin, use of the website etc is all taken care of for this inclusive price. Here is how it works:
For purchases, there is an annual tiered system that works as follows:
- On the first £20,000 invested, the company charges a service fee of 1%
- For amounts between £20,000 and £50,000, the service fee drops to 0.75%
- For amounts over £50,000 and up to £100,000, this fee drops again to 0.5%
- For any amounts invested over £100,000, the service charge is 0.25%, the lowest tier
The minimum amount that you can invest in the financial instruments available on WiseAlpha is a mere £100. There is no maximum ceiling on the amount that can be invested and the higher the investment is, the lower the overall average fees.
By way of an illustration, if you are a relatively wealthy investor who buys (e.g.) £1m in a 3-year 6.75% bond, the annual service fee that you will pay is 0.2925% or £2,925. The following table illustrates what the investment would return net when held until maturity.
|Payments Received||Service Fees||Pre-Tax Net Gain|
|Year 1 Interest||£67,500||£2,925||£64,575|
|Year 2 Interest||£67,500||£2,925||£64,575|
|Year 3 Interest||£67,500||£2,925||£64,575|
If you decide to sell your bonds prior to their maturity date for whatever reason, there is a flat 0.25% fee which is applied to the principal amount. It’s worth checking, but for some EUR denominated fractional bonds, I’ve seen zero fees being offered. Great news if you have Euros to invest. There are far more GBP-denominated bonds than EUR ones on the system, although more are gradually being added.
Deposit & Withdrawal Methods
Adding funds into WiseAlpha is fairly straightforward. This can be done using a debit card or bank transfer. The handling of debit card payments goes via a company called ‘Global Collect Services USA’, so you’ll see that appear on your statement. In comparison to other trading platforms, WiseAlpha comes out pretty favourably thanks to their straightforward fees structure.
Site Security, Privacy
We looked into the information security controls of WiseAlpha for completeness. After all, this could be significant sums of money that you’re entrusting them with.
Access to the website platform is secured using the industry-standard SSL (secure sockets layer) that is used all over the Internet these days. This is where you see a padlock icon in the browser address bar. It’s used to prevent hackers from snooping on your communications with the site, providing privacy via prevention of interception of user names, passwords as well as any interactivity that you have with it.
Beyond that, there is 2-factor authentication in place as an added measure. This works by prompting you for a code which is sent to your mobile phone every time you log in to use the system. Therefore, only you should be able to gain access to your account (unless someone also steals your phone and can access it).
The WiseAlpha.com servers reside in data centres located in Ireland that are managed using industry-leading AWS cloud computing infrastructure. High availability firewalls protect clients from external threats and data is replicated across multiple availability zones in separate physical locations to ensure it is always highly accessible. I know all this because I asked!
Who Owns WiseAlpha?
WiseAlpha Technologies Limited, a private limited company registered in England with company number 08967521 was registered in early 2014 by Rezaah Ahmad, who is one of the main shareholders along with Michael Curtis. Rezaah is the sole Director.
WiseAlpha has also raised funds using the crowdfunding platform Crowdcube and Seedrs for marketing & advertising purposes. Companies House information lists all of the various allotments of A, B and C class shares made since inception if you are interested.
WiseAlpha Technologies Ltd provides an exclusive license to WiseAlpha plc, a separate legal entity.
The plc is an Irish company, based at 12 Merrion Square in Dublin (company number 650450) and it acts as a counterparty to clients who invest in each of WiseAlpha’s Fractional Bonds. These are in turn backed by the underlying “actual” corporate bond whose economic terms pass through to the Fractional ones.
Although the plc owns the bond, and any interest payments (and the principal at maturity) received for each corresponding bond proportionately flow through on a pro-rata basis to WiseAlpha Technologies’ clients (net of the service fee).
The company’s HQ itself is based out of London’s Canary Wharf, one of the main hubs of the UK finance industry. Rezaah Ahmad is the CEO and responsible for the company’s direction and day-to-day operations.
The company has a small, dedicated support team which (in my experience) has always been very fast in answering any query that I’ve had. The options for contacting them are plenty; phone, email and live chat. It’s not yet 24-hour support, however, working UK business hours.
How to Use WiseAlpha
Once logged in to WiseAlpha, you can browse the different markets and see all of the bonds by clicking on the “Market” link.
Within this section, different categories are available in either a list or grid view. The grid view provides you with a quick overview of what’s on offer and important details pertaining to each bond issue. You can then drill into the details of each one by clicking on it to find out more.
Where you see the Buy button available, there are bonds that can be bought and the Status column shows you the amount available on the market at the current time. Where the full allocation of bonds is already purchased by other customers, you need to put in a request to buy more of these should you want them.
There are also some bonds on WiseAlpha that are ‘sold out’. That is, the underlying bond purchased by WiseAlpha plc has been snapped up completely by other customers. In this case, you won’t see the “Buy” button available on the system. Rather, there will be a heart-shaped icon taking its place, like so in the case of the EDF bond:
By clicking on the heart, this tells WiseAlpha that you are interested in this particular bond. You will then receive an email whenever this bond becomes available. What’s more, if there is a particular corporate bond that is not listed on the WiseAlpha platform at all, you can contact the support team at email@example.com and put in your request.
Robowise – Automated Investing
One of the features of the WiseAlpha platform that must be mentioned is called ‘Robowise’. As the name might suggest, it’s a way to automatically create a balanced portfolio based on your preferences.
Let’s say that you don’t have the time or inclination to research individual bond issues but do want a piece of the action. If that’s the case then you can put your target return into Robowise which will select a corresponding basket of bonds. You can even choose to have Robowise manage multiple portfolios while you personally manage your own additional portfolio of self-selected bonds.
A balanced portfolio or Adventurous one can be selected. Clearly, the latter is inherently riskier with higher returns.
Robowise may also sell bonds automatically on your behalf in the act of balancing your portfolio. There’s good news here in that the 0.25% fee that is normally charged for selling a bond prior to mature does not apply to sell transactions initiated by Robowise.
Bonds Currently Available
You can buy GBP and EUR denominated bonds on the platform. Senior Secured and Unsecured bonds provide different levels of risk and return. Here is a sample of some of the bonds currently available (updated August, 2020).
Is WiseAlpha Any Good? Concluding thoughts
I am using WiseAlpha for my corporate bond investment portfolio and writing about the management of it here on our website.
You will probably have got the gist of my opinion of the offering from having read everything above in this review. However, it would be prudent to get a wider view. Naturally, the people at WiseAlpha know that, too, and have thus been very transparent in asking their users to provide public reviews and the results are there on the Trustpilot site for all to see.
If you do look there, you will note that the number of “excellent” reviews by far outweighs the rest. The majority of people appear to be very happy with it. In fact, of the very few ‘poor’ reviews on that site, one of them is left by someone who couldn’t get past the multiple-choice quiz questions and another is from someone who couldn’t log in. That should speak for itself.
There are many factors to consider and it will ultimately come down to a calculated risk on your part based on all of the facts. For some investors, the service fee of only 1% could be a dealbreaker. Are you comfortable with buy-and-hold or do you think that you might need to sell before the bond matures?
21st May 2020
14th May 2020
7th May 2020
❓ How Does WiseAlpha Work?
In a nutshell, WiseAlpha works by allowing individual investors to buy into fractional corporate bonds using their online platform.
📒 Which Bond Classes are Available?
Investment Grade and High Yield corporate bonds are available on the WiseAlpha platform.
💷 Can I Sell my Bonds Before the Maturity Date?
Yes, you can sell previously purchased corporate bonds by accessing WiseAlpha's secondary market.
💷 What are the Maximum Fees Payable?
You will pay a maximum of 1% in management fees on WiseAlpha fractional bond purchases if you buy and hold until maturity.
That’s it for this WiseAlpha review. Finally, always keep in mind that an investment in corporate bonds carries much more risk than a savings account – and you could lose all of your money.