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Structural shifts intact as retail buyers chop and change; Big bond managers' split opinions

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Over to the managers

Markets continue to grind higher, but investors are distinctly uncertain of how to take advantage. That’s one conclusion to be drawn from the latest retail fund sales figures, which show a retreat from a wide variety of equity regions at the end of the first quarter.

As that implies, data from the Investment Association emphasises something of a regional rotation in March. Most pertinent was the £1bn net redemption from US equity funds – around three times higher than any other monthly figure on record. Outflows from Europe and Japan funds also accelerated, while Asia ex-Japan strategies posted their first redemptions in a year.

Yet an overall net inflow of £1.1bn for equity funds shows this wasn’t a wholesale flight from the asset class. Emerging market funds saw their best net flows for several years, while UK growth fund flows were also back in black.

But the biggest beneficiaries, by far, were global strategies, which took in £1.5bn. It’s not just DFMs who are leaving those tricky regional allocation calls to others at the moment.

One thing that hasn’t changed much is investors’ favoured distributors: assets held directly with DFMs continued to fall away as savers shift to on-platform models.

And despite all the talk of a strong spring for Isas, pension saving is still the main driver of retail investing nowadays. Yes, net inflows of £815m made this March the best Isa season for eight years. But that still wasn’t enough to match the amount invested in personal pensions (£908m). You now have to go back four years to find the last time monthly Isa inflows outstripped their pension counterparts.

High stakes

Last month we spent some time discussing the high-yield sweet spot, and how strategic bond funds are taking advantage. Our analysis looked at a cohort of 20 or so funds, and found a notable uptick in BB-bond allocations. But the opinions of the sector’s biggest names are altogether less coherent.

The five most popular strategic bond funds among DFMs, according to our database, are those run by Allianz, Artemis, Jupiter, Janus Henderson and TwentyFour. Of these, Allianz and Jupiter are typically the most cautious. So it’s perhaps no surprise to see both management teams express concern last month. Members of Allianz’s team forecast that US high yield will lose money over the next two years, while Jupiter points to a cyclical top of credit and “a number of red flags” in junk debt, not least record-low credit spreads.

Artemis’s James Foster, by contrast, has upped HY exposure from 30 per cent to 40 per cent of his fund since the start of the year. Janus Henderson’s John Pattullo and Jenna Barnard sit somewhere in the middle, believing credit markets are early cycle but “pricing and trading as if it were late cycle”.

The UK junk bond market is a point of particular interest for some. TwentyFour note that the ‘Brexit premium’ long priced into UK credit is starting to disappear, a change that's helped sterling high-yield's performance since the start of the year. The fund house thinks this trade has further to run, meaning sterling credit is still “an interesting place to look for relative value”.

That phrase speaks to the consistent thread running across all bond desks: even cautious players think there are still opportunities to be found. Whether there are enough opportunities to propel all portfolios forward is a harder question to answer.

Following suit

If there were any allocators still expecting UK interest rates to turn negative, today’s Bank of England forecasts will have shown them the error of their ways. The BoE now expects the UK economy to grow 7.25 per cent this year, up from a forecast of 5 per cent three months ago.

That’s providing the economic reopening can be sustained, of course. This caveat aside, the thrust of today’s message is clear: the central bank is once again falling into line with its US counterpart. The BoE was at pains to say it will only tighten policy if inflationary pressures are a) real and b) persistently above its 2 per cent target. As with the Fed, chances are it'll have to reiterate that message more than once in the months ahead.

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