The latest Investment Association figures reflect this. Combined net retail sales of its fixed income sectors peaked at £267m in April 2015, but by September, net retail sales outflows swelled to £515m.
Guy Dunham, head of global aggregate at Baring Asset Management, says fears about liquidity in corporate bond markets created an environment where many investors felt low yields did not justify taking significant positions in fixed income.
“Overall there was little appetite for adding to fixed income and as a result, certain sectors of the market saw significant outflows, notably high yield and emerging market bonds,” he suggests.
Can the asset class find favour among investors again in 2016? “In some respects, the start of this year is similar,” says Mr Dunham.
“The debate is still around commodity prices, oil in particular, Federal Reserve policy – how fast they will raise rates rather than when – and how Chinese policymakers will respond to weaker growth.
“Having said that, what affects bond markets also affects other sectors. Fixed income always has a place in a portfolio to dampen the volatility offered by equity markets and to attempt to provide some downside protection, even when return expectations may not be particularly attractive in absolute terms.”
Within the asset class, many managers continue to express a preference for developed market over emerging market bonds. But Nick Hayes, senior fund manager at Axa IM fixed income, hints the balance may be shifting – or at least on an opportunistic basis.
“We’ve played the developed market over the emerging market for the last few months or so, but maybe that starts to change in 2016,” he says. But he is taking a cautious stance when it comes to duration.
“We’re concerned clearly that we see more interest rate rises in the US [and] at some stage we’ll start to see those in the UK. So we have a pretty cautious view on government bonds. [We] think government bonds should start to sell off once we get through this period of a very negative start to the year on some of the risk assets.”
Interest rate risk played on investors’ minds in 2015, ahead of the first US rate rise, but David Absolon, investment director at Heartwood Investment Management, warns credit risk is creeping back in.
He says: “The reason we’re getting more concerned about credit risk is after the great financial crisis, corporates raised lots of cash. They used a lot of that to refinance existing debt. The difference now is that they continue to raise lots of debt and so leverage levels on balance sheets are getting worse, but at the same time they’re not using much of that debt to refinance existing debt.”
Instead, he believes corporates are using the debt to pay equityholders, either via dividends or share buybacks – “that is not good from a bondholder perspective”.
Mr Absolon does not think bond markets will “blow up” in 2016, but he says the bond market is not cheap and there are still risks.
However, he adds: “I think sovereign bonds in the UK should continue to have a part in global multi-asset class portfolios. They continue to be one of the better diversifiers.
“They certainly add some balance and ballast to a portfolio in periods of equity market volatility and we can see that just in the first weeks of this year, bond yields have gone down in a period of equity market volatility.”
Ellie Duncan is deputy features editor at Investment Adviser