As new rules come into force opening up the UK corporate bond market to retail investors, Aberdeen Investments has outlined the key considerations investors should weigh before allocating capital to the asset class.
The Financial Conduct Authority this month confirmed regulatory changes designed to make it easier for retail investors to participate in corporate bond issuance, as well as company fundraisings and stock market flotations.
The reforms form part of the government’s broader ambition to encourage a stronger investment culture in the UK and increase household participation in capital markets, as policymakers seek to channel more domestic savings into productive finance.
Historically, corporate bonds have largely remained the preserve of institutional investors, owing to complex documentation, disclosure requirements and high minimum subscription sizes. These factors typically placed direct participation beyond the reach of most retail investors.
Under the new regime, retail investors should be able to subscribe alongside institutions, lowering the entry barriers to primary issuance.
The move also comes amid calls for market standards that would require all Plain Vanilla Listed Bonds, along with UK IPOs, to include a dedicated retail tranche by default.
However, Aberdeen Investments warns that while the reforms expand access, they also heighten the importance of due diligence, risk assessment and portfolio construction discipline.
Luke Hickmore, investment director for fixed income at Aberdeen Investments, said the reforms were a welcome step, particularly at a time when sterling investment grade issuance has been declining.
“We applaud the government’s move to open up the corporate bond market to retail investors and help continue to encourage an investment culture in the UK,” he said.
“The number of companies coming to the sterling investment grade market has been falling, and any move to help bolster issuance, while encouraging diversification, is positive.”
However, Hickmore cautioned that the breadth of the market, with more than 950 UK investment grade bonds available, makes careful selection essential.
“Investors need to understand rating quality, yield and maturity profile before committing capital,” he said.
“They should also consider exit liquidity. Unlike cash, if you want to sell a bond, there needs to be a buyer on the other side, and in the retail market liquidity can be patchy.”
He added that short duration bonds, typically maturing within one to five years, may offer a more attractive risk-return profile for retail investors, combining yield above cash with lower sensitivity to interest rate and liquidity shocks.
Aberdeen said direct bond ownership can appeal to retail investors seeking cost efficiency and predictable cash flows.
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Unlike bond funds, direct holdings do not incur management fees and offer certainty over maturity, assuming no default.
From a tax perspective, sterling corporate bonds may also benefit from favourable capital gains treatment, though income tax still applies to coupon payments.
However, corporate bonds carry materially higher credit risk than government securities such as gilts, meaning investors must assess issuer balance sheets, cash flows, leverage metrics and sector-specific risks. This process requires significant analytical resources.
Holding bonds through a fund structure can help mitigate these challenges by outsourcing credit research, improving diversification and offering exposure across sectors, geographies and maturities.
Mark Munro, investment director for fixed income at Aberdeen Investments and manager of the firm’s Short Dated Enhanced Income Fund, said short-dated bond strategies may represent a structural sweet spot in the current environment.
“These strategies typically invest in bonds maturing within three years, which we believe offers a compelling balance between yield, risk and volatility,” he said.
“Investors could replicate this exposure by selecting individual bonds, but a fund structure allows access to a broader opportunity set, backed by dedicated research teams identifying relative value and managing downside risks.”
Portfolio construction implications
The reforms arrive at a time when multi-asset investors are increasingly reassessing the role of fixed income within portfolios, particularly following the sharp rise in yields since 2022 and the re-emergence of bonds as a meaningful source of income.
For asset allocators, the expansion of retail access to corporate debt may provide greater flexibility in portfolio design, enabling more granular duration and credit positioning. However, Aberdeen cautioned that increased access should not dilute discipline, particularly given the asymmetric downside risks associated with credit.
As retail participation grows, the firm expects greater emphasis on credit selection, liquidity management and maturity profiling. These areas have traditionally distinguished institutional fixed income strategies from retail offerings.