Absolute return bond funds are seeing a surge in popularity from retail investors as concerns mount about potential losses from traditional fixed income funds.
Most experts believe that the US will begin to raise its interest rates within the next few years, with the UK likely to follow suit, which will mean bond yields are likely to rise.
A rise in yields corresponds to a fall in the value of the bonds, meaning investors in conventional bond funds are likely to lose money.
In response to these anticipated losses, absolute return bond funds, which can use derivatives and other instruments to make money when the markets fall, have seen a pick-up in inflows in the past year.
The £213.1m Swip Absolute Return Bond fund, run by James Carver, has more than doubled in size in the past year, driven by the fund’s consistently positive return profile since the beginning of 2009.
Mr Carver said the prevalence of low bond yields had made long-only bond products a high risk, low reward investment and had led to more interest in absolute return bonds.
He said the past year had seen a change from having to go out and explain the rationale behind absolute return bonds to potential investors to now receiving regular calls from interested buyers.
He said: “The flows are not just out of other fixed income products. Some people are trying to de-risk from equities, but do not want go into conventional bonds and lose money.”
The top-selling absolute return bond fund has been the Ignis Absolute Return Government Bond fund, which has already reached £1.5bn in assets in spite of only being launched in 2011.
However, the Sicav fund has seen the majority of its sales coming from continental Europe and is mainly seeing interest from more sophisticated investors.
The demand for absolute return bond funds from institutional and sophisticated investors is far more established than among retail investors, where the concept of absolute return is still not viewed positively by a significant proportion of advisers and investors.
Mark Holman, chief executive of fixed income boutique TwentyFour Asset Management, said the firm was looking into launching an absolute return bond fund in 2014, but only for institutional investors because he thought there was far more demand for such a fund there than in the retail space.
However, the retail inflows into the Swip fund – as well as Ian Winship’s £88.2m BlackRock Absolute Return Bond fund – in the past year show that investors are being increasingly converted.
Mr Winship said that for too long there had been a lot of simple homogenous products in fixed income and investors were just beginning to realise they needed to have access to funds that acknowledge the fixed income market would not always go up.
He said: “Interest rates will go up, although probably not by much more in the short term, but we are trying to prepare for that future.”