A hunt for yield, historically low interest rates, and equity market rallies, have all combined in recent months to put the fixed income sectors firmly on the back foot.
While most investors still hold some form of fixed income in their portfolios, for the sake of diversification if nothing else, the majority it seems are going for the strategic option and the extra flexibility these types of funds offer.
In the first four months of 2014, the only IMA fixed income sector that has recorded positive net retail inflows in each month has been the IMA Sterling Strategic Bond sector.
While the Sterling Corporate Bond sector saw some positive inflows in March of £95m, it quickly fell to outflows of £1m in April. Meanwhile, the High Yield sector has only seen positive net retail sales figures in February. UK Gilts equally only had positive inflows in one month out of four in January, while Global Emerging Market Debt funds struggled for the whole of the first quarter, following the regional sell-off, but made a storming return in April with net retail inflows of £173m.
Only the Global Bond sector has been within touching distance of the popularity of the Strategic Bond sector, with positive retail sales figures in February and March, although the latter only just counts as it broke even at zero net retail sales.
It seems that given the difficult economic environment, investors are diversifying their bond exposure to try and get the best possible returns.
Jason Hollands, a managing director at Bestinvest, says: “With expectations of eventual rate rises in the US and UK, but the potential for the introduction of full-blown quantitative easing in the eurozone, fixed income markets could prove erratic over the coming year. We therefore favour funds with very flexible mandates to position across the credit spectrum and manage duration.”
That said, however, the average performance of the IMA fixed income sectors show that it is the IMA UK Index-Linked Gilts sector that has delivered the best return for the year to date to June 26 2014 of 4.65 per cent. The performance of most of the fixed income sectors are relatively close together, so by removing the UK Index-Linked Gilts and the UK Gilts sectors, the best performing peer group becomes the IMA Sterling High Yield sector with an average return of 4.43 per cent.
Interestingly, the Sterling Strategic Bond sector falls into third place behind its Sterling Corporate Bond peers with a return of 4.34 per cent, which suggests that either investors are willing to sacrifice some short-term returns for added flexibility or there is about to be a further shift around the fixed-income sectors.
Ralph Gasser, absolute return product specialist at Swiss & Global, notes: “Attractive buying opportunities can be found in fixed income sub segments, including emerging market bonds, convertible bonds and structured bonds. However, the main earnings potential is in strategies based on price distortions and corrections.”