Throughout the past year, investors had fears about liquidity in certain bond markets, such as corporate bonds, and low yields did not result in good enough returns to take strong positions in fixed income. There was poor appetite from investors and many sectors saw huge outflows.
The asset class as a whole remained broadly out of favour among UK investors last year, as Investment Association (IA) figures prove. Fixed income saw a record net retail outflow of £519m during 2015, compared with a net retail inflow of £1.5bn in 2014, but so far in 2016 things have changed, with fixed income funds being some of the most popular with investors.
According to the most recent data from the IA, April saw fixed income as the best-selling asset class in the month, with net retail sales reaching £679m. Both the Sterling Corporate Bond and Sterling Strategic Bond sectors were the fourth and fifth best-selling sectors with £205m and £191m in net retail sales, respectively. Strategic Bonds in particular saw a great leap in just one month, from £35m in March – a 445 per cent increase.
The volatile start to markets this year could be a reason behind people flocking to bond funds that are generally more stable than their equity counterparts.
Table 1 shows the top 20 performing fixed income funds over the past five years. It compares all funds from the UK Gilts, UK Index-Linked Gilts, Sterling Corporate Bond, Sterling Strategic Bond, Sterling High Yield, Global Bonds and Global Emerging Markets Bonds sectors using FE data.
Performance across the sectors has been broad and not one specific space stands out as being an outperformer. The best performing fund is the Ireland-domiciled €64.7m (£49.6m) Pimco GIS Euro Ultra Long Duration fund, managed by Lorenzo Pagani, which saw a £1,950 return over five years based on an initial £1,000 investment – 14.3 per cent annually. The fund sits in the Global Bonds sector, and has the majority of its holdings (79.4 per cent) in European vehicles while 29 per cent are AAA-rated bonds. The fund’s objective states that it invests in high-quality, very high-duration global fixed income instruments which are benchmarked against 25-, 30- and 35-year swap indices with an average 27- to 33-year duration.
This year brings many uncertainties, which started back in December last year, when the US Federal Reserve raised its rates by 25 basis points to between 0.25 per cent and 0.5 per cent – the first move since June 2006 – which brought an end to the zero interest rate. Now the focus lies on how fast, rather than when, the Fed will raise rates again.
The UK’s referendum on EU membership has also been one of the biggest headwinds of the year so far. And with both the European Central Bank (ECB) and Japan continuing their quantitative easing programmes, there are still many issues that lie ahead. But with this in mind, has the fixed income space had to change at all, and are different asset classes within the space becoming more correlated?
“The element of downside risk management in fixed income has been on display in recent years, leading to a fairly decent annualised return. In addition, average correlations to equity markets have been low,” Arif Husain, head of international fixed income at T. Rowe Price says.
