I make it that the FTSE 100 has climbed 6% so far this year, though the rally has flattened out in recent weeks. The S&P 500 is up 10% in the same period. Still many investors have been reluctant to participate, with long-term focused fund pickers instead preferring to go down the bond route.
Take a look at the most recent IMA stats – the start of the equity rally began sometime in mid-December, yet the best selling retail fund sector in December and January was Sterling Corporate Bond. UK All Companies was the worst seller in January.
Perhaps we should zoom out and take a look at data from a wider pan-European perspective. According to Morningstar’s latest Europe Asset Flows Update, fixed income funds accounted for €12.5bn of the €15.3bn inflows into funds across the continent in February, the strongest inflows the asset class has had since August 2010. Equity funds in comparison saw net redemptions.
Hunt for high yield
Fund pickers are obviously looking beyond any short-term trends, still it seems that investors are hungry for income with bond inflows dominated by corporate debt, especially high yield funds. Growth can take a back seat for now.
“I think the dilemma you face when you are putting a portfolio together, certainly at the lower risk end of the spectrum, is you want to have a reasonable amount in defensive quality assets but you do not want to have too much in the way of gilts,” says Stephen Hunter, director, private clients & charities, at Cornelian Asset Managers.
“That puts us in investment grade credit and while we are not wildly bullish here we still think we can get a decent return provided that the spreads can contract. I am still happier to go into higher yielding bonds if you can get 7% or 8% whilst accepting the higher volatility.”
Sticking with cash
What about equity income funds? Interestingly, one of the leading lights in the domestic sphere, Carl Stick at Rathbones, recently revealed he had cut holdings in some of his one-time favourite stocks – Diageo, BAT and Imperial Tobacco – in favour of raising his cash weighting to 12%. This is nothing to do with the quality of the businesses, he said, but more to do with their current high valuations and his anticipation of a market correction.
If high profile equity managers are selling up, it is no surprise that investors are following suit. These are all generalist observations, of course, but it seems that given the experiences of market volatility over the past five years, some investors have been happy to miss the boat this time around.
