Fixed Income  

‘Investors favour riskier bond funds over equities’

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    But, in spite of this, inflows to equity funds has been dwarfed by the stampede into bond funds overall this year, according to Morningstar asset flow data.

    The latest raft of data – which includes more than 23,000 of the 29,000 funds Morningstar tracks – shows bond funds as the primary choice for European investors, posting inflows of €22.05bn (£17.8bn).

    Among bond funds, it is the riskier offerings that have been most sought after as 2012 draws to a close. According to the Morningstar data for October, high yield, corporate, and emerging market bond funds were among investor favourites, as well as flexible, ‘go-anywhere’ vehicles investing across countries, credit quality, maturities and issuers. According to Morningstar analyst Ali Masarwah this ongoing trend is “mirrored by sizeable outflows from both euro and sterling government bond categories”.

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    He adds, however: “The motivation for the continuing bond fund craze is open to interpretation. In the end, defensive and aggressive motivations alike may lead to the same dead end, as yield compression [and] growing levels of risk could well take their toll.”

    Dave Sekera, bond analyst at Morningstar, notes: “While a rising tide has lifted all boats and credit spreads have tightened across the board, we generally expect the rate of improvement in credit quality to stagnate as global economies weaken and corporate earnings are pressured.”

    The main beneficiaries of the bond fund boom include investment giants such as Pimco and BlackRock, with funds from companies such as BNP Paribas and Santander witnessing significant outflows.

    Mr Masarwah explains: “Getting the timing right when allocating between stocks and bonds is challenging for investors under normal circumstances and has become even more so in times of market stress. Unsurprisingly, inflows into allocation funds have been heavy for some time.”

    The figures released for October support this view, with cautious funds recording €1.21bn in inflows, the highest of all allocation fund categories, according to Mr Masarwah.

    He adds: “As is the case with bond funds, investors in allocation funds tend to stick to the big names, pouring money into M&G Optimal Income fund, Baillie Gifford Diversified Growth, Invesco Balanced Risk Allocation and Newton Real Return.

    The biggest concern for investors in 2013 is getting income from a portfolio. As bond yields start to wane, they will have to start taking more risks to get the level of income they desire.

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