The amount of money flowing into bonds is "insane" and could cause a "blow-out" on the scale seen in 1994, according to Simon Edelsten, manager of the Artemis Global Select fund.

Edelsten says that investors hoping to find safety in the asset class are leaving themselves open to a disaster when yields inevitably rise. 

"It’s a classic bubble in bonds," he said. "And the reason it’s happening is regulatory activity." 

"The regulation is telling financial institutions to buy more bonds at the wrong price. From the regulatory point of view bonds are put down as one category, but the price you buy at changes the risk." 

"Furthermore, the risk is measured against you getting back your capital, but if inflation means your capital is worth less when you get it back then you’ve obviously lost money." 

FE Trustnet revealed this morning that low-risk funds in the mixed-asset and fixed income sectors have done well over the past five years due to the strong performance of their bond holdings.

IMA figures show that investors continue to be keen on these funds, and in April the Corporate Bond, Mixed Investment 20-60% Shares and Strategic Bond sectors were the three most popular among retail investors. 

The worry is that people are chasing the latest big thing, and Edelsten points out that investors in bonds have been caught out before. 

"The bond blow-out of 1994/1995 was totally unexpected. When these things happen they happen very quickly," he said. 

In May, FE Trustnet reported on a similar warning from Jan Dehn, strategist at Ashmore Investment Management, who said the flight to safe-haven bonds would lose many investors up to a third of their money. 

While Artemis Global Select is an equity fund, Edelsten doesn't recommend that people limit themselves to funds like his, rather that they keep a balanced portfolio. 

He does claim that an equity fund can be a conservative investment, however, and says that with co-managers Rosanna Burcheri and Alex Illingworth he is cautious in his stock picks and only buys attractively valued companies. 

It is just over a year since the fund launched, and according to data from FE Analytics it has made 1.63 per cent in this period, while its IMA Global sector has lost 4.19 per cent and its MSCI World Index benchmark has lost 0.39 per cent. 

Performance of fund vs sector and benchmark



Source: FE Analytics

Edelsten says the flight from perceived risk turns up opportunities in the shunned sectors.

He finds attractive valuations in some European stocks that have revenue streams in the emerging markets. 

"In a lot of European countries there are companies with better credit ratings than the governments," he commented. 

"The yield on German government bonds is zero, but I can get a higher yield on a European corporate like Nestle which is at least paying me a yield of four per cent for the risk." 

Louis Vuitton Moet Hennessy is another European corporate in Edelsten’s top-10 holdings, supported by the strong demand for luxury goods in Asia. 

The manager says that although he thinks bonds are going to blow out eventually, the timing is beyond him, and he has a warning for those who think they can take their profits and get out.

"The best people in the world on bonds are PIMCO, and they have got everything wrong recently." 

"If they can’t get it right, why does anyone else think they can beat them, the Federal Reserve and the other central banks in predicting the bond market?" 

"Calling the end of the market is a fool’s game," he finished.