By Dena Aubin
NEW YORK, May 15 (Reuters) - Individual investors are increasing their holdings of U.S. corporate bonds in a search for yield, but few have a good understanding of bonds as an investment, a recent survey found.
Of 229 broker-dealers surveyed across the country, 83 percent said clients are buying more corporate bonds, but 86 percent believe individual investors have a "poor to average" understanding of bonds, according to a survey completed in February by LaSalle Broker Dealer Services, a division of ABN AMRO.
"The vast majority say, 'I've learned the lessons of the equity market, I've learned the lessons of diversification,'" said LaSalle managing director Patrick Kelly, speaking at a press briefing in New York on Thursday. Though sold on bonds, many investors believe buying them is mystifying, he said.
Confused by such arcana as accrued interest, discounts and premium bonds, many investors turn to bond mutual funds, but then relinquish control over key features such as the timing of cash payments and bond maturities, Kelly said.
"There's a lot of people who want to have control of that themselves," said Kelly. "They want to be more individually involved."
Many are turning to LaSalle's "Direct Access Notes," a product designed to give ordinary investors access to a world once dominated by Wall Street and high-net worth individuals, he said.
Issued in denominations of $1000, the notes are sold directly to investors by such blue chip companies as International Business Machines Corp. , United Parcel Services Inc. and General Motors Corp.'s finance arm, General Motors Acceptance Corp.
Sales of Direct Access Notes have grown almost tenfold, to $21 billion last year from about $2 billion when they were launched in 1999, Kelly said. That is still a small piece of the $4 trillion corporate bond market, and Kelly is not expecting a stampede into the program.
"Chasing the latest hot thing is the wrong way to go," he said. Individual bonds belong in investors' portfolios, but so do bond funds, stocks and stock funds, he said.
Direct Access Notes are sold through broker-dealers, but because 95 percent of orders are placed electronically, overhead costs are low, allowing LaSalle to offer the notes at rates comparable to institutional market rates, he said.
An issue of Caterpillar Financial Services Corp. notes maturing in 2006 was offered by LaSalle this week at a yield of 2.008 percent. Caterpillar notes with a similar maturity traded recently in the institutional market at yields ranging from 2.176 percent to 2.459 percent, according to MarketAxess.