Indeed, in the last four months alone investors have piled more than £5bn into the multi-asset bond sector, at the expense mainly of UK equity funds with the UK Equity Income and UK All Companies sector witnessing outflows of £121.8m and £81.3m in November respectively.
The least popular fund sector in November proved to be the Specialist sector, which witnessed outflows of £444m.
Outside of fixed income, which was most popular asset class of the month attracting more than £2bn of net retail sales, November was a good month for multi-asset funds as they were the second best-selling asset class with £1.2bn. The IA Mixed Investment 20-60% Shares and 40-85% Shares sectors ranked second and fourth as the most popular peer groups, taking in £305m and £255m respectively.
Across the board, total net retail sales for the November hit £4.4bn, down from the £5bn recorded in October, but significantly up on the £1.8bn sold in the same month last year.
“UK investors preferred fixed income funds in November, despite the Bank of England raising base rates by 0.25%,” said Alastair Wainwright, a fund market specialist at the IA, commenting on the figures. “For the sixth month in a row, fixed income was the best-selling asset class.”
For Laith Khalaf, a senior analyst at Hargreaves Lansdown, the popularity of bond funds at a time of rising inflation and tightening monetary policy is “hard to fathom”. He said both of these factors “make wringing returns out of an already fully-priced fixed income market look like an uphill struggle”.
“Portfolio rebalancing is one possible answer, as investors may have taken profits on equities and topped up their bond holdings to maintain their preferred asset allocation,” he said. “In addition, after 10 years of ultra-low interest rates, perhaps some cash investors have finally given up the ghost and traded up the risk spectrum in search of a higher income.
“Earlier this week, bond guru Bill Gross called the start of the bond bear market, though in January 2010 he also told us that the UK gilt market sat on a bed of nitroglycerine, at which point yields were three times higher than they are today. To be fair, he wasn’t alone, and hindsight is a wonderful thing.
“Today, monetary policy looks like it is going to tighten very slowly, which suggests the bond bubble may deflate rather than burst. However, that’s still going to make turning a profit on bond investment more challenging.”
Khalaf added that bonds do provide some diversification to a portfolio in case things don’t go as well as planned, noting that even at these low levels monetary policy can go in both directions.
“Perhaps therein lies the rub – there is a great deal of negativity towards the UK, as evidenced by continued withdrawals from UK equity funds,” he said. “This pessimism may well be manifesting itself in bigger bond inflows, as investors seek to protect against some of the risk that they see emanating from the Brexit negotiations and a weak government.”