Retail investors sold £2.4 billion of bond funds in February

Figures released by the IA today show that investors withdrew £2.5 billion from investment funds in February.

A total of £2.4 billion of this outflow was bond funds and this suggests inflation and rising interest rates spooked investors, rather than the Ukraine crisis.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “Investors sold down a huge chunk of bonds in February, in the biggest outflow since the start of the pandemic. £2.4 billion flew out of fixed income funds over the course of the month, while equities saw a fairly negligible outflow of £47 million. The flight from safe haven bonds suggests investors were spooked by inflation and rising interest rates, rather than the Ukraine crisis. However, the Russian invasion only happened towards the end of the month, so perhaps a greater effect will be seen in the data showing investment activity in March.

“The outlook for bonds does not look good. While there has been a sell off this year, long dated bond yields are still looking pretty low when you consider high single digit inflation and the prospect of rapid interest rate rises. The UK 10 year gilt is currently yielding around 1.7%, still low by historical standards, particularly given the current macroeconomic picture. The bond market 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. 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.

“Investors also remain sour on UK funds, despite the Footsie holding up relatively well so far this year. They chose instead to buy the dip in the US market, with North American funds registering a £588 million net inflow. While the US market still trades on a lofty valuation, the fact that investors seem keen to pile in at the first sign of blip suggests there is support there should prices falter. US interest rate policy remains a live issue for the S&P 500 though, considering just how much of the index trades on a high valuation, which makes it more vulnerable to interest rate increases.

“2022 hasn’t been a good year so far for ESG funds however. 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 £670 million of net inflows in February, compared to an average monthly inflow of £1.3 billion in 2021. However, that’s probably a good result against a backdrop of poor sentiment overall, as so far this year retail investors have reacted to heightened uncertainty by withdrawing a total of £3.7 billion from investment funds.”