Surprise events such as Donald Trump’s US election triumph, which potentially heralds the return of inflation, have understandably made fixed income investors more cautious of late. Many remain convinced the asset class faces an even tougher time in future.
Theoretically, this is where strategic bond funds should be stepping in. The ‘go-anywhere’ premise behind these funds, and the ability to combine the likes of government bonds with more esoteric emerging market debt or high-yield offerings, has a strong appeal. But figures from the Investment Association suggest retail investors may not have been as easily swayed, in spite of the macroeconomic circumstances.
The IA Sterling Strategic Bond sector has seen net retail outflows in six of the past 13 months to the end of September. In terms of positive inflows, the IA Sterling Corporate Bond sector fared slightly better, while the UK Gilts group was more popular still having recorded just two months of negative flows in November 2015 and February 2016.
In performance terms, the Sterling Strategic Bond sector is also struggling. Comparing the seven IA fixed income sectors for the year to date, the IA UK Index-Linked Gilts sector average ranks top with a return of 23.2 per cent to November 17, while the IA Sterling Strategic Bond sector lags at the bottom with an average return of just 6 per cent, data from FE shows.
More recently, in the wake of the Brexit vote, investors did appear to rediscover the strategic bond asset class, with net retail inflows of £247m and £264m in July and August respectively, before slipping back to just £92m in September. With the US election result likely to cause more uncertainty, this sector could see renewed interest.
So is fixed income still a good option? Mark Dampier, head of investment research at Hargreaves Lansdown, notes: “Whether the bond bull market is over is difficult to predict. The rise in bond yields [after] the Trump victory has to be put in the context of the huge falls in bond yields seen this year. A correction was surely overdue. Many government bonds around the world were trading with negative yields.
“However, until central banks become more hawkish I think bond yields are likely to stay in a trading range. For example, 10-year gilts have oscillated between roughly 0.5 and 3 per cent over the past few years, and are currently at 1.4 per cent – a figure that brings them back to where they were just before the Brexit vote. None of this means bonds are good value: they have just gone from being unbelievably expensive to being just extremely pricey.”
Danny Wynn, head of fund partners for Fidelity International, says that many investors appeared to be dipping their toes into more cautious assets in September, albeit with a trend for diversification. “With defensive assets such as fixed income proving to be in high demand in September, it is evident there was still a sense of caution among investors,” he says.
Meanwhile, the latest outlook from Whitechurch Securities notes: “[October] was another difficult month for fixed interest markets as yields rose on generally more upbeat economic data from the UK, US and Europe. In addition, the news-flow from central banks intimated that monetary policy has reached the limits of its efficacy, with rising speculation that the baton for future growth is being passed on to fiscal policy.”
