A mixed picture for bonds and equity income

This article is part of
Hunt for Income - March 2015

In the search for yield, especially as we enter the new world of retirement freedoms, it is perhaps unsurprising that many investors are heading straight for equity income products.

Figures from the Investment Association show that the UK Equity Income sector has been the best selling of all its sectors in terms of net retail sales for nine of the 12 months to the end of January 2015.

In fact, for the past 12 months both the UK Equity Income and Global Equity Income sectors have posted positive net retail sales, while the bond sectors have seemed to falter in terms of popularity.

The only fixed income sector that has seen consistent net retail inflows over the year has been the Sterling Strategic Bond sector, although its peak of £278m in July 2014 pales into insignificance against the £1bn of net retail money that flowed into the UK Equity Income sector in the same month.

The bond sector that has suffered the worst, however, has been the Sterling High Yield peer group, which has recorded net retail outflows for 11 of the past 12 months, receiving only a brief respite in September 2014 when it saw positive inflows of just £2m.

Interestingly, the popularity of these funds does not necessarily coincide with performance over the year to March 17 2015. While by far the most popular with investors, the UK Equity Income sector average is just 8.71 per cent, while the Global Equity Income peer group average of 13.6 per cent puts it into second place.

The Sterling High Yield sector is by far the weakest, with an average return of just 1.69 per cent over the year, but the surprise performers have been the IA UK Index-Linked Gilts sector, which delivered an average return of 13.99 per cent and the IA UK Gilts sector with an average of 12.71 per cent.

Of course, while the average return of these funds has been positive, the individual fund performance in the two gilt sectors range from a low of 0.77 per cent to a high of 23.43 per cent.

In addition, with 10-year UK government bond spread yields sitting at roughly 1.67 per cent, income investors need to be aware of exactly what they are investing in and what it is likely to deliver, rather than being swayed by short-term performance numbers.

The idea of ‘safe haven’ investing in government bonds may still appeal to some investors in spite of this. But with such low yields currently available on most major developed-market government bonds, and with the likelihood of further quantitative easing in both Europe and Japan, the outlook for bond investors is as much of a mixed picture as that for the equity income sectors.

With a UK general election less than two months away and continued global macro and political headwinds, 2015 looks unlikely to be a straightforward year for income investors.

Nyree Stewart is features editor at Investment Adviser