Fixed income funds accounted for around 15% of total retail funds under management in March, according to the IMA’s latest figures. During that month, the Sterling Corporate Bond, High Yield, UK Gilts and UK Index Linked Gilts and Global Bond and Global Emerging Markets Bond sectors together accounted for just £4m net inflows.
The outlier is the Sterling Strategic Bond sector which was the third-best selling sector in the month, with £241m net retail sales. But could the ongoing popularity of these ‘go-anywhere’ funds and the promise of dynamic asset allocation really counter the wider concern that we have reached the end of a 30-year bull market for bonds?
A tough year
Charles Younes, an analyst at FE Research, stresses that the past 12 months have been much harder for fund managers after yields in long-duration bonds rose last May following 10 years of a general decline.
He says: “Over a three year-period the average fund in IMA Strategic Bond sector has made around 20% and over five years the figure is almost 60%. No fund has lost money over either period. Over the past year the average fund has made just over 3%, with a number losing money.”
While in 2008 government bonds were the place to be, then investment grade credit in 2009, Younes believes it is currently far more difficult to see now where the big returns are coming from.
“Only the most flexible strategic bond managers will be able to eke out returns,” he remarks.
“Over the past year, managers have been rewarded for avoiding long duration bonds, emerging market debt and inflation linked bonds. Those that have been prepared to invest in certain areas of the high-yield debt market are those that have performed best.”
Where's the juice?
He adds: “Most of the juice from the UK high-yield market has already been consumed, but areas such as European peripheral banks and government debt has been a good place to be.”
However, not all wealth managers have been charmed by the strategic bond fund route, including Andrew Herberts, deputy head of private investment management (UK) at Thomas Miller Investment.
“We prefer to go down a purer route – if we think there is a requirement to have inflation protection or we think real assets are going to work we are not going to hide that through a strategic bond fund which may have 20% that is not invested in fixed interest,” he says.
“If we want real assets then we’ll make the asset allocation decisions ourselves. There are some great strategic bond fund managers out there, but we think our clients are paying us to make those decisions.”
In terms of the 1.8% UK inflation figure, Herberts says it is hard to form a trend from one month which might be a blip, though he believes central banks in general will be quite happy to bring more inflation into the system.
“I think tapering is in the market however, and I don’t think that central banks are going to do anything else to reverse quantitative easing anytime soon,” he adds.
“There’s no doubt that we’ve seen a 30-year bull market in bonds and we saw the troughs in interest rates last year at around 1.4% for the 10-year UK gilt. As the economy normalises, I think interest rates will normalise and run higher.”
Herberts ultimately breaks it down to two reasons why investors would buy into fixed interest: to get a positive real return and because of risk management and the volatility profile of bonds.
“There will always have a place in portfolios as long as you can buy something with a reasonable expectation of a positive real return, even if it is lower relative to other asset classes,” he concludes.
