Bond funds bleed £2.4bn as rising inflation and Ukraine crisis trigger mass outflows

Rising inflation and interest rates have prompted investors to pull £2.4bn out of fixed income funds in February.

It is a staggering increase on the £344m worth of bonds retail investors sold in January, underscoring the sharp shift in sentiment towards fixed income.

Investors withdrew £2.5bn in total from UK retail funds in February, according to the latest figures from the Investment Association (IA), with the escalating crisis in Ukraine toward the end of the month adding further fuel to the fire.

Commenting on the data, AJ Bell’s head of investment analysis Laith Khalaf said: “The outlook for bonds does not look good.

“While there has been a sell-off this year, long-date bond yields are still looking pretty low when you consider high single-digit inflation and the prospect of rapid interest rate rises.”

He flagged that the UK 10-year gilt is currently yielding around 1.7%, which Khalaf said was “still low by historical standards, particularly given the current macroeconomic backdrop”.

“The bond mark could also be about to lose a key piece of price support too, as central banks in the UK and US look to scale back and unwind their QE programmes,” he added.

“Bonds can still offer useful diversification for a portfolio, but the risks that have been sitting in the asset class since the financial crisis look like they may be coming home to roost.”

See also: Janus Henderson: Shorter-dated bonds offer best protection

Not a great year so far for ESG

It was a fairly benign month for equities, which saw £47m walk out the door, but that is likely a reflection of the £1.6bn in net outflows recorded in January.

Mixed asset funds lost £182m in February, while funds of funds saw £54m in net outflows.

Of all the categories covered by The IA, only two reported net inflows in February: tracker funds and responsible investments.

Just over £1.3bn flowed into passives, double the £672m recorded in January, while ESG-focused strategies scooped up £670m.

Despite bucking the trend, Khalaf said 2022 “hasn’t been a good year so far for ESG funds”.

“We’re only two months in, but the run rate on sales appears to be around half of what it was last year. Responsible funds saw £670m of net inflows in February, compared to an average monthly inflow of £1.3bn in 2021.

“However, that’s probably a good result against a backdrop of poor sentiment overall, as so far this year retails investors have reacted to heightened uncertainty by withdrawing a total of £3.7bn from investment funds,” Khalaf added.

Investors turn to commodities and dividend heroes

Emma Wall, head of investment analysis and research at Hargreaves Lansdown, said: “Markets have been difficult to navigate in the past month, sending investors broadly in two directions – capital preservation and opportunistic trading.

“As the war in Ukraine caused uncertainty and volatility, and the outlook for inflation across the globe rose ever higher, investors have pulled money out of markets and off the table. Those that have been investing have looked to income funds, global equities and specialist sectors to hedge their bets.”

Walls said Hargreaves Lansdown clients have “looked to take advantage of the market drawback – particularly within the most beat up growth-style sectors such as technology”.

“Alongside growth-biased equity funds, clients have been adding ballast to their portfolios in the form of broad multi-asset solutions from Troy and Schroders. Responsible funds have also attracted flows, proving that the drive to align profits and ethics is no passing fad.

“The most bought investment trusts in March see speculative investing into commodities as well as dividend hero trusts whose yield will help clients battle ever-rising inflation.”

Hargreaves Lansdown: top net buys for March:

Funds and investment trusts are in alphabetical order.