PA ANALYSIS: Is now the time to be flocking into bonds?

Investors’ love affair with bond funds shows no signs of abating, with recent statistics from FundsNetwork showing the Sterling Corporate Bond sector was the most purchased peer group in July.

PA ANALYSIS: Is now the time to be flocking into bonds?

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Alongside corporate bond funds there was robust demand for other bond sectors, with the Sterling Strategic Bond and Global Bonds sectors also in the top 10, while no UK equity sectors made the list.

The sales suggest that investors continue to be cautious regarding domestic equity markets in particular, with sales of mixed asset funds also strong, while the global equity sector was the second most popular in the month (down from first in June).

Outflows from UK equity funds have been making the headlines in recent months. The Investment Association reported that in May and June combined some £1bn of assets was redeemed from the IA UK All Companies sector, while money has also poured out of the traditional fan favourite UK Equity Income sector.

So what is drawing retail investors to bond funds?

It certainly isn’t returns. According to FE Analytics, year-to-date, all IA bond categories lag the UK All Companies’ sector average return of 8.56%. Indeed, the average return in the IA Sterling Corporate Bond sector is nearly half of that at 4.79%, while the mean return in the Sterling Strategic Bond peer group is 4.6%.

“In my view, nervousness is drawing investors into bond funds,” says Ben Yearsley, a director at Shire Financial Planning. “It certainly isn’t due to any tempting returns on offer. With interest rates set to remain low in the UK, even if there is a 0.25% rise in rates the outlook is still stable. 

“At a time of heightened uncertainty for investors, with Brexit and North Korea as two prime examples, the perceived safety of bonds is relatively enticing. However, with poor yields on offer, and rising inflation, I can’t get excited and certainly won’t be increasing bond allocation at this time.”

Peter Lowman, chief investment officer at Investment Quorum, seconds the notion of investors becoming cautious about global equity markets.

He says: “Firstly, we are in our ninth year of this bull market, secondly, valuations in some markets look stretched, and thirdly, we do face a more challenging time for the financial markets from both a geopolitical and political perspective. 

“Clearly, bonds are more expensive than equities on a number of measures, but of course, in times of uncertainty this asset class is regarded as a ‘safe haven’ alongside gold bullion and selective currencies such as the yen and Swiss franc, all of which have performed fairly well of over the summer months.”

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