Based on recent UK data from Morningstar, it seems that Investors are dumping bond funds like never before and selling up their fixed income allocation in favour of Absolute Return funds and commercial property investments. Corporate bond funds recorded the worst quarter on record for the three months to the end of June, with outflows of £536 million.
May 2015 saw investors sell £220 million worth of corporate bond funds – significantly more than previous lows in June 2006 and March 2011. Fund flows by Investment Association sector displayed a similar story, with the strategic bond sector recording outflows of £2.6 billion in the second quarter – the largest outflows on record. April May and June each separately topped the worst previous months on record, with June seeing outflows of £1.3 billion. The worst hit fund for the quarter was M&G Optimal Income which saw staggering outflows of £2.3 billion.
This exodus of capital follows an extremely volatile period for government bonds and seems to indicate that investors are losing confidence in bonds as safe haven assets.
Where are Investors Putting Their Cash?
The most popular Morningstar category in the second quarter was Multistrategy, which is predominantly Absolute Return funds, with inflows of £2.2 billion in the three months to the end of June. Topping the most popular fund list was Standard Life Global Absolute Return fund with inflows of nearly £1 billion in the three months to the end of June. The fund has seen inflows of £1.9 billion since the beginning of the year. Invesco Perpetual Global Targeted Returns came second with inflows of £751 million.
Property funds were the second most popular Morningstar sector with inflows of £835 million. The most popular fund within the sector was Henderson UK Property with inflows of £222 million in three months.
Having fled from bonds, it appears that nervous UK investors are seeking refuge in the Targeted Absolute Return sector. However, it is important to realise that this sector is a mixed bag and many of the funds have a somewhat chequered history of delivering gains in difficult market conditions.