The sector launch coincided with fund flows data from Morningstar suggesting that, across Europe, local currency EMD funds registered hefty outflows of €3.1bn during November.
However, the report also revealed a tough month for fixed income in general as rising bond yields and buoyant equity markets prompted investors to look to risk assets – open-ended equity funds posted net inflows of €8.42bn, while bond funds suffered net outflows of €2.08bn.
Of course, this is just one month of data and shouldn’t trouble long-term investors too much, but with equities seemingly singled-out as the place to be in 2014, it would be no great surprise were this trend to continue.
So what do fund pickers think? Tom Becket, CIO at PSigma remarks that “allocating to fixed interest markets should only take place with a stiff drink in hand”.
“The threat of rising bond yields and the reduction of QE stalk today’s bond investor,” he adds.
“We are almost exclusively focusing on specialist managers and specific opportunities. Airlie US Select High Yield is one such fund, where the managers only invest in bonds that have a small issue size, are trading below par and yield over 8%.”
The rise of the fixed income ‘specialist’ has been also coincided with the popularity of strategic bond funds, which leave the micro asset allocation across multiple sectors to one fund manager.
Ben Gutteridge, head of funds research at Brewin Dolphin, is of the opinion that this year could be a challenging one for “generic” bond funds as longer-dated interest rates continue to creep upwards.
“As a result, our top pick within the bond universe is structurally positioned to cope in this environment,” he adds, singling out Invesco Perpetual Global Financial Capital Fund.
“There are a number of variables that should allow the fund to deliver. If, as we believe, longer-dated interest rates are rising due to better economic growth, the asset quality of financials’ balance sheets should also improve. Furthermore, the improved margin from making additional loans, while deposit rates remain firmly anchored, will be earnings enhancing.”
Investment grade obviously still plays an important role in wealth manager portfolios then but the types of funds, and their complexity continues to expand from strategic, to absolute return to emerging market debt. The alpha-seekers are out there, and they’re just as active as their equity colleagues.
You can read more about the state of fixed income markets in the forthcoming February edition of Portfolio Adviser.
