Will more bond funds turn away new flows?
Will liquidity concerns in the corporate bond market cause groups to follow M&G and limit inflows?
As equity markets continue to be somewhat volatile, fixed income has become the default option for many investors. In 10 out of the last six months of 2011 and the first six months of 2012, the bestselling IMA sector has been a fixed income peer group.
Funds in the IMA Sterling Corporate Bond sector in particular have become beneficiaries of this apparent switch from equities, with the sector recording net retail inflows of £222.9m in June alone. It has also been the bestselling IMA sector in the past three quarters and has topped the IMA’s monthly bestselling list every month in the first half of this year, except for March, when it was knocked off the top spot by the Sterling Strategic Bond sector. It is unsurprising to note the sector has seen its funds under management increase by approximately £4.2bn in the first half of 2012 to a total of £53.9bn funds under management.
However, this flood of money into the sector is not necessarily a good thing. Liquidity in the corporate bond market – the amount of money committed to buying and selling bonds – has been the cause of some concern for a while, particularly following the financial crisis. Sharp inflows into a sector can suddenly reverse, causing liquidity to evaporate. This presents a problem for fund managers in a sector, or for clients who may wish to withdraw their money from assets that have suddenly become illiquid.
Gary Potter, co-head of the F&C Thames River Multi-Capital team, notes the move into corporate debt or bond funds is somewhat understandable amid the current macroeconomic environment and choppy equity markets.
But he warns that “the market and the behaviour of operators in the market, be it advisers or clients, through risk reduction have found their way to the corporate debt market, in many ways because they don’t like equities rather than that they like corporate debt.
“There are some very good reasons why corporate debt isn’t that bad,” he says. “Undoubtedly corporates are in rude health around the world, so picking up a piece of corporate debt or a bond fund with pieces of corporate debt in it, which are relatively well underpinned and producing a reasonable rate of income might be seen as a satisfactory solution for the time being, but what that’s done is create this herd mentality where people have shunned other risk assets.
“The fact that the average equity income fund yields now more than the average corporate bond fund tells you quite a lot.
“The yields aren’t great, but they’re acceptable and they meet certain risk requirements and it all kind of naturally follows that money pours into the corporate debt sector. I can understand that, but I think that could well prove to be a big mistake on a medium-term time horizon if you’re a long-term investor.”