Funds suffer biggest outflow this year, but bonds remain in favour
Investors preferred the steady income and defensive properties of bonds over the stock market in September, writes Sam Benstead.
6th November 2023 09:56
by Sam Benstead from interactive investor
Share on
![Close-up of an investor's face](https://media-prod.ii.co.uk/s3fs-public/2020-10/visin_0.jpg)
UK-based investors flocked to bond funds in September, as high yields and the prospect of a pause in interest rate rises increased the appeal of fixed income.
The Investment Association (IA) reported that the four bestselling fund sectors for the month were all bond funds: UK Gilts with net sales of £237 million, Corporate Bond with £209 million, Government Bond with £194 million, and Sterling Corporate Bond with sales of £192 million.
- Invest with ii: Buy Bonds | Free Regular Investing | General Investing with ii
This contrasts with a poor month for equity demand, with UK All Companies the most-hated sector registering net outflows of £884 million. UK funds overall saw outflows of £1.3 billion, while Global funds gave up £729 million in assets.
The equity outflows were the key driver in funds overall recording their largest monthly withdrawals year-to-date.
Bonds bucked the trend, with investors drawn to the higher income on offer on the back of interest rate rises that have played out since the end of 2021. Gilts currently yield between 4.1% and 5%, depending on the maturity date. Meanwhile, investment grade corporate bonds yield around 6%.
- Everything you need to know about investing in gilts
- Terry Smith adds tech stock owned by Smithson to flagship portfolio
- Five fund trends catching our eye
While yields are a big appeal, investors are also hoping for capital gains as well, particularly if and when interest rates start to decline. Bond prices generally respond positively to falling interest rates, and with rate rises now on pause in the US, UK and Europe, investors are anticipating when rates could fall again. This is reflected in a fall in yields over the past couple of months, which is a result of higher bond prices.
Elsewhere, responsible investments saw outflows of £544 million, the highest outflow on record, according to the IA. Responsible investment funds under management stood at £95 billion at the end of September. Their overall share of industry funds under management is 6.9%.
Tracker funds saw net retail inflows of £991 billion in September 2023, taking total assets under management to £301 billion at the end of September. This is nearly 22% of the UK funds industry, the IA points out.
Chris Cummings, chief executive of the IA, said: “Investors continue to be squeezed by inflationary pressures and the cost of living, as net inflows into funds experience their second quarter of decline.
“UK Gilts continue to be a favourite throughout the uncertainty and was the best-selling sector in September, and an increased inflow into Mixed asset funds was a bright spot in a challenging month.”
- Interest rates held again: prepare your portfolio for the next phase
- The bond funds making money despite the fixed-income crash
- Bond Watch: what ‘higher for longer’ rates mean for bond prices
Fund groups with bond expertise saw big inflows over the past three months. The latest Pridham Report of fund flows showed that one of the most successful active managers was Royal London Asset Management (RLAM), which has seen significant demand for its short-dated fixed income range over the course of the year.
The Royal London Short Duration Gilts and Royal London Short Term Fixed Income funds were among its best-sellers. M&G Investments, which runs the Super 60-rated M&G Emerging Market and M&G Global Macro Bond, also had a good three months for flows.
The top-selling asset management groups for net flows were BlackRock, HSBC Asset Management, Royal London and Legal & General Investment Management. Apart from Royal London, these groups have large passive investment arms, reflecting growing demand for index funds and exchange-traded funds (ETFs).
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.