Investor optimism boosts demand for equity and bond funds

UK-based investors added significantly to their bond fund holdings in March, as higher yields helped bring £809 million in new cash to the sector.  

The data, from funds trade body the Investment Association (IA), shows how interest rate rises have increased the appeal of bonds.

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UK government bonds (gilts) maturing in 10 years’ time now yield 4.3%, up from 3.6% at the start of the year, while sterling investment grade corporate bonds yield 5.8%. Given that the inflation rate is now around 3%, investors are getting a positive real yield.  

The most popular bond sector was Corporate Bond, with £251 million in positive net flows.  

However, the IA points out that flows into fixed income are beginning to plateau as investors anticipate a cut to rates in 2024, meaning that other asset classes could begin to regain both popularity and strength. 

Overall, March produced a turnaround in demand for investments with net £446 million added to funds. This followed heavy fund outflows of £1.1 billion and £2.7 billion respectively in January and February. 

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Global equity funds attracted a lot of money, with £842 million flowing into the sector over the month, according to IA data.  

Equities generally were popular in March, registering their first month of net inflows since December 2021.  

This follows a period of strong equity performance driven by hopes for near-term interest rate cuts. 

However, investors are still pessimistic about the outlook for UK shares. The worst-selling IA sector in March 2024 was UK All Companies, which experienced outflows of £887 million. Overall, UK funds saw net outflows of £1.3 billion in March.  

This comes even as UK shares recover and perform similarly to American shares this calendar year. 

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The FTSE All-Share is up 6% in 2024, including dividends, compared with a 7% gain for the S&P 500.  

Tracker funds remained popular, attracting £2.9 billion, up a further £800 million from February. Passive investing is now 23.5% of the UK funds’ market, with £345 billion invested. 

Miranda Seath, of the IA, says easing inflationary pressures alongside expectations of interest rate cuts resulted in a more optimistic outlook among investors.  

She adds: “While inflation continues to fall, expectations of rate cuts have been scaled back quite dramatically in April, following recent data that suggests inflation will take longer to fall back to target levels. It remains to be seen how investors will react to this, which coincides with continued geopolitical tensions.”