‘Lower-for-longer’ rates should mean fee rethink

In this environment, there must be a case that plain old conventional bond funds should cut fees.

The negative yield phenomenon is largely concentrated in Japan and the eurozone, where central banks have cut interest rates below zero, and it’s starting to spread to these shores, too. Gilts of less than five years in duration have traded in negative territory at times this summer.

It’s all part of the latest move downwards in yields that’s affected all parts of the curve. Take 30-year gilts: yields moved from 2.2 per cent to around 1.3 per cent after Brexit.

That has meant capital gains of almost 20 per cent in two months. Welcome, but this is not the reason why these products are being purchased.

More pertinent than the capital growth is the very low yields now on offer to those in need of income, and the very real risk of capital loss – as the sell-off at the end of last week demonstrated.

Conventional gilt funds, and even corporate bond products, are hardly top of fund selectors’ buy lists; understandably, buyers tend to look in more esoteric areas nowadays.

Ultra-low yields may be a temporary madness, but we have been saying as much for years.

That was in February, when the total amount of negative-yielding sovereign bonds stood at a mere $6trn.

By June, Goldman Sachs was estimating that 25 per cent of all European corporate bond funds – let alone those focused exclusively on government bonds – had total expenses greater than the typical yield on medium-dated company debt.

The situation doesn’t look quite so serious in the UK, but underlying yields (which, to be fair, are net of fees) are now little more than 1 per cent for gilt funds. And even that is only achieved by stuffing portfolios full of even riskier longer-dated debt.

Ultra-low yields may be a temporary madness, but we have been saying as much for years. The risk of buying has never been greater, yet that doesn’t mean yields are going to revert to ‘normal’ levels any time soon – not while base rates are where they are.

So lower-for-longer should prompt a reassessment of fund expenses. Asset managers will say it costs them the same amount to run a fund, but when the rewards on offer are so meagre, investors need all the help they can get.

Dan Jones is editor of Investment Adviser