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Investors wake up and smell the bond returns

by LLB Editor
6th Jul 23 12:05 pm

Latest fund sales figures from the Investment Association show government bonds were the best-selling sector in May but some bond sectors saw outflows.

Money market funds also proved popular and tracker funds saw £1 billion of inflows.

But money is still seeping out of active funds and UK equities.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “Retail investors have woken up and smelled the bond returns, ploughing substantial sums into fixed income funds, according to latest data from the Investment Association. In May £658 million flowed into the government bond sector, which comprises global government bonds, and £344 million went into the UK gilts sector. It seems likely this is a combination of private investors buying government bonds and multi-asset funds boosting their fixed income allocation, seeing as the global government bond sectors are pretty esoteric.

“Given the much higher yields on offer from fixed income, it’s hardly surprising to see investors move in the direction of government bonds. However not all fixed income sectors had such a great month, with the Corporate Bond Sector and the Sterling Strategic Bond sector seeing outflows. This suggests there is a premium being put on safer government bonds, which makes sense when you can harvest healthy returns without taking on significant credit risk. Money market funds also saw large inflows, which again suggests an element of caution amongst investors, but in the world of higher interest rates, that no longer means giving up the ghost on returns.

“Equity funds by contrast had a bit of a stinker of a month, with £1.4 billion of outflows, driven in large part by a £1.2 billion outflow from UK equity funds, which remain the ostracised pariah of the investment universe. Tracker funds did well, posting just over £1 billion of retail inflows. Given that overall retail funds saw £356 million of inflows in total, that suggests active funds faced outflows of around £700 million over the course of the month. This chimes with the most popular fund purchases on the AJ Bell Platform in the first half of the year.

“As run rates go, a £700 million monthly outflow is still a better result than last year, when in total active funds saw an estimated £37 billion outflow. In the current investor environment, most active managers are likely to stay close to their wickets, avoid swinging for the fences, and try to bat out the onslaught of the passive machines.”

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