Funds suffer biggest outflow this year, but bonds remain in favour

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.  

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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%.

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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.”  

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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).