asset allocator header image

Asset Allocator

from Asset Allocator

Record breakers

Spare a thought for those in the City whose bonuses are calculated based on a September year end. The latest data from the Investment Association shows that month had the worst-ever outflows from equity funds.

Of the £3bn of outflows, £1bn was pulled from UK equity funds, and £828m from global equity funds.

And at least some of that capital has found its way into bond funds, which had net inflows in September of £1bn. Some £288m of that found its way into the Sterling Strategic Bond sector. 

Much discussion has taken place around the inverse correlation between bonds and equities that underpins the rationale for the 60/40 portfolio.

Ben Seager-Scott, head of multi-asset funds at Evelyn Partners, says bonds and equities tend to be positively correlated when an inflation shock happens, as interest rates rise, hurting the returns from both asset classes.

But if, as may be happening now, the inflation shock is displaced by a growth shock- fear of a recession - then the traditional inverse correlation between bonds and equities resumes, according to Seager-Scott. 

As economic data trembles on the edge of recession in many parts of the world, it may be that investors are expecting the traditional correlation to resume.

Corporate bond funds had net inflows of £172m. The most widely held corporate bond fund among the allocators on our database is Rathbone Ethical Bond. Run by the long-serving Bryn Jones, this is a £2bn fund.

It has lost about £800m since last November, mainly due to performance, with the fund having lost 22 per cent over the past year, compared with a 20 per cent loss for the IA Sterling Corporate Bond sector. 

Ethical funds can often have an advantage in the fixed income world, because many of the sin stocks in which they can’t invest, in areas such as tobacco and oil, are companies which generate a lot of free cash flow, and have less need to issue bonds, so the ethical investor is not necessarily missing out on an opportunity relative to the conventional investor.

The Rathbone Ethical Bond fund also refuses to invest in government bonds, on the basis that most governments buy weapons. Government bond performance has, of course, been foul this year.

The largest sector exposure in the Rathbones Ethical Bond fund is to banks and insurers, sectors which would be expected to benefit from rising interest rates, but arguably haven’t done so. 

This fund is held in six of the portfolios on our DFM database. The next most widely owned is the Artemis Corporate Bond fund, which is held in five portfolios. 

Almost all equity regions saw outflows, with even IA North America, which has proved more durable in recent years, had over £500m withdrawn from it, while European equity funds had £564m of withdrawals.

Get the story behind the stories
The daily newsletter for fund buyers