Net redemptions totalled £624m from retail investors – the biggest volume since IMA records began in 1992 – while equities remained the bestselling asset class overall, with net inflows of more than £880m.
The outflows from bond funds are only a fraction of the £120bn or so under management overall, but still signify a significant change in sentiment given that fixed interest was the in-demand asset class with investors until not so long ago.
FE data suggests that the biggest contributors to the outflows include the likes of M&G Corporate Bond, Invesco Perpetual Corporate Bond, Baring Corporate Bond and M&G Strategic Corporate Bond. All have seen outflows of between £100m and £200m over the last three months, our data shows. In an article earlier this month, FE Trustnet looked into what impact these outflows have had on the funds in question.
Industry experts point out that the losses sustained by bond markets in late May and June as a reason for the outflows. These were prompted by Fed chairman Ben Bernanke’s suggestion that quantitative easing in the US could end as early as next year.
Bond funds have had a stellar run since the financial crisis, sending yields across the corporate and sovereign debt market to historic lows. This has come in the context of a strong run for bonds throughout the 1980s, 1990s and early 2000s.
Performance of indices since 2000
Source: FE Analytics
However, the record low yields, combined with the likelihood of rising interest rates in the near future, has led many commentators to believe the stellar run for bonds is coming to an end.
"The highest ever net redemptions of fixed income funds by retail investors may have been a response to anxieties about future tapering by the Fed and other central banks," said Jonathan Lipkin, director of public policy at the IMA.
Bestinvest’s Jason Hollands (pictured) went a step further, insisting that the outflows from corporate bond funds and sovereign debt funds were justified.
"The news from the IMA that fixed income funds have seen record redemptions does not surprise us," he said. "We have been warning for some months over the growing risks in fixed income and the absence of fundamental value across much of the market.""The culprit here is so-called 'quantitative easing', which involves huge bond-buying programmes by the US Fed and other central banks. This has severely distorted prices in large parts of the fixed income market, to the point where many bonds look expensive and offer yields that simply aren’t attractive once inflation is factored in."
"In particular, developed market government bonds, index-linked bonds and investment grade corporate bonds look vulnerable as and when the markets finally decide that QE will come to an end. Investors are therefore right to wake up to the fact that so-called 'low risk' bonds will generate capital losses at some point."
Hollands recommends that investors who still want exposure to fixed interest funds should look for one with maximum flexibility, as this will give its manager the best chance of protecting against the downside when interest rates do rise following an end to QE.
"In the current environment, we favour strategic bond funds for fixed income exposure, though the focus of these will be overall return rather than income yields," he said.
"These funds have a high degree of flexibility to move across the bond universe and also the ability to shorten the average duration, which is a way of minimising volatility."
"Good funds we rate highly are Kames Strategic Bond, Legal & General Dynamic Bond, M&G Optimal Income and TwentyFour Dynamic Bond. These funds are generally running with quite short average durations of around two years, which should help reduce volatility."
"We also think high-yield bonds offering more attractive yields should be less exposed to changes in interest rate expectations but will not be completely immune from any future turmoil. AXA Global High Income is our favoured fund, though we also like the AXA US Short Duration High Yield fund," Hollands added.
Performance of funds and sectors
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) |
|---|---|---|---|
| Legal & General Dynamic Bond | 8.67 | 15.4 | 74.76 |
| M&G Optimal Income | 9.85 | 28.67 | 71.99 |
| Kames Strategic Bond | 7.63 | 17.81 | 46.31 |
| PFS - TwentyFour Dynamic Bond |
14.61 | 26.73 | N/A |
| IMA Sterling Strategic Bond | 6.68 | 20.96 | 38.15 |
| AXA US Short Duration High Yield | 4.13 | 14.61 | N/A |
| IMA Global Bonds | 4.07 | 13.98 | 52.34 |
| AXA Global High Income | 10.63 | 28.04 | 53.55 |
| IMA Sterling High Yield | 12.14 | 24.22 | 52.96 |
Source: FE Analytics
Hargreaves Lansdown’s Adrian Lowcock agrees that bonds look like a risky bet on any significant time horizon, but he questions whether some investors have sold out of them too soon.
He rejects claims that a great rotation is occurring from bonds in to equities.
"In June, bond yields rose as prices fell, and for the first time in a long while, investors experienced a loss on their fixed income investments," he said.
"Bond markets recovered quickly, having initially over-reacted to Bernanke's comments. One month’s data is not enough to decide whether investors are now in redemption mode from corporate bonds or if this was a knee-jerk reaction."
"The rate of QE might slow down in the US but has been expanded significantly in Japan. Monetary policy is likely to remain loose for some time yet and the yields on cash low. This puts a ceiling on how far bond yields can rise."
"It has become more difficult to make money in bonds; however investors can still access attractive yields of around 4 to 5 per cent."
"There will be a time to sell out of bonds, but we don’t think this is it yet. Investors looking for fixed income exposure should consider strategic bond managers who are able to invest across the whole of the bond market and make tactical short-term investment decisions to profit from periods of volatility," he added.
Looking beyond the bond sectors, IMA Mixed Investment 20%-60% Shares was once again the bestseller. This was thanks largely to the popularity of funds such as Invesco Perpetual Distribution and Jupiter Merlin Income.
IMA Property saw net retail sales of £132m in June 2013 – the highest levels since July 2010.
Within the overall equity sales, the UK was the standout performer, with net retail inflows of £479m. This is the highest level of inflows since October 2006.
Global equity funds were the second-bestsellers in June 2013, with net retail sales of £262m. They were previously the bestsellers in every month since May 2012.
It was also a good month for tracker funds, which saw inflows totalling £347m.
