Bond funds make a comeback as best seller in April

Fixed income was the bestselling asset class in April for the first time since August 2012 while equities shed close to £100 million as UK investors flee to safety, according to the Investment Association (IA).

Fixed income funds received £329 million in net inflows during April, the most they have received since October 2012 when bond funds took £367 million and the first time fixed income has been the bestselling asset class since August 2012.

In contrast, equity funds saw their first net outflow since September last year, shedding £91 million in April compared to a net inflow of £103 million in March. This is the most equities have lost as an asset class again since August 2012, when the asset class shed £570 million.

BAD NEWS FOR BOND HOLDERS

This marks a significant reversal in the trend away from fixed income and towards equities that has been seen over the past three years, which has been stoked by historically rock bottom yields across bond markets as economies across the globe continue to get back to growth.

However, good economic news from the US combined with a rising oil price has given investors cause for concern that interest rates may soon rise in the world's largest economy, which caused a sharp rise in global bond yields in late April and May.

While bad news for current bond holders, higher yield are good news for new investors. UK government bonds are currently paying 1.87 per cent, an 18 per cent increase since 27 April, while the yield on US 10-year Treasuries are 11 per cent up on a month ago at 2.17 per cent.

However, the spikes are unlikely to have affected April's fund flows with factors such as the general election and continuing instability in the eurozone likely to have been the drivers behind UK investors' flight to the perceived safety of bonds.

However, the spikes are unlikely to have affected April's fund flows - not least as the inverse correlation between bond yields and bond returns means that most bond funds have posted negative returns over the past month. According to Lipper, the Barclays Aggregate Global Bond index shed 2.4 per cent in April.

Instead factors such as the general election and continuing instability in the eurozone are likely to have been the drivers behind UK investors' flight to safety.

CAUTIOUSNESS

Adrian Lowcock, head of investing at Axa Wealth, comments: 'High market valuations and concerns over the outcome of the UK's general election result meant investors remained wary of taking on more risk, preferring to head to bonds which would be less sensitive to the short-term effects of the results of the general election.

'Cautiousness toward equities has been a trend for much of 2015 as investors wait to see evidence of earnings growth coming through, the general election result and a resolution over Greece.'

Investors' tendency towards safer, or traditionally less volatile, assets was also evident in April's bestselling IA sector; targeted absolute return, which recorded net retail sales of £529 million, the highest the sector has ever taken.

Targeted absolute return funds aim to deliver positive returns in any market conditions, making them attractive in volatile or uncertain markets. Popular vehicles include Standard Life's Global Absolute Return Strategy fund, which has over £25 billion of assets under management.

However, like all investments targeted absolute return funds do not guarantee positive returns and often run complex, difficult to understand strategies. As such a number of industry figures have raised concerns over the amount that private investors are pouring into them.

These include Patrick Connolly, certified financial planner at Chase de Vere: 'Stock markets have risen strongly in the past six years and many fixed interest assets seem over-priced. In this environment investors are looking to absolute return funds to provide protection in their portfolios.

'However it is essential for investors to understand exactly what they're buying and the likely risks involved. The name targeted absolute return could give the perception of security and imply that these funds will give positive returns in all environments; this is very unlikely to be the case.'

Gina Miller, founder of private investor advocacy organisation the True and Fair Campaign, is also sceptical. 'There is currently a very high-profile UCITS fund (with over £25 billion invested) that is sold to retail investors but which invests in highly complex investment strategies normally the preserve of hedge fund professional investors.

'This is so complex that it is highly unlikely that many advisers or retail investors comprehend it, and within which the key counterparty risks are entirely unquantified and the key individual counterparties completely un-named. In our view such products should be appropriately classified as suitable only for professional investors,' she says.

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