The 2022 flows data from Refinitiv Lipper paints a dark picture indeed, with the total assets of the UK fund market declining by £26bn during the year.
All asset classes bar money market funds suffered outflows, but perhaps the best sign of the times was that while actively managed bond funds in the UK market had outflows of £20bn in 2022, passive products and ETFs had combined inflows of £17.8bn, with more than £6bn of that total accounted for by inflows into ETF products.
Of course the rise of passives and ETFs has been a feature of equity markets for years so it's probably not surprising that the trend is coming to bondland.
But there has been an interesting debate recently about the use of corporate bond ETFs, given a study published by academics from a trio of US business schools.
They found that fixed income ETFs can suck liquidity out of corporate bonds at time of market stress.
Dickie Hodges, the veteran bond fund manager at Nomura, shares concerns about liquidity. He says some parts of the fixed income universe, including emerging market debt, performed strongly in January 2023, "largely as a result of the wall of cash chasing those assets".
He says passive inflows into bond markets were extensive in January, but that since the start of February flows have turned negative, with the result that performance for the asset class is weaker.
A glance at our databases shows a clear pattern of passives being preferred for government, index-linked and short duration bonds.
But in the corporate bond and high yield universes, actively managed funds are the most widely-owned.
The iShares Corporate Bond Index ETF gained some traction over the past year, now being owned by three allocators, having picked up two new buyers.
It is now tied as the most widely-owned passive corporate bond fund with Vanguard's UK Investment Grade Bond Index fund.
For context the most popular corporate bond funds in our database (all active) are Rathbone Ethical Bond held by six DFMs, Artemis Corporate Bond held by five and TwentyFour Corporate Bond held by four.
In the world of high yield bonds, no passive fund is held more than once.
On our ESG database, no passive corporate bond instrument is owned by more than two allocators while Rathbone Ethical Bond and CT UK Social Bond are held by nine DFMs.
So perhaps the trend, long evident in equities, of fund houses launching active ESG products as a shield against the rise of passive, will shortly arrive in bondland.
