However, Lowman cautions that it must be remembered that “one swallow does not make a summer”. Therefore, he says he would need to see this momentum trade into bonds continue for a number of months rather than just last month.
“Obviously, any announcements from the Federal Reserve on monetary tightening or a surprise pick-up in inflation would not bode well for bonds, especially given that corporate earnings for many companies have been surprisingly good in the second quarter and could surprise us further over the next couple of quarters, hence our positive tilt towards equities at the current time,” he says.
However, Lowman says at the same time it does make sense to have some selective bond exposure in portfolios.
“With that in mind,” he adds, “we would suggest investors focus upon those fund managers who have shown in the past exceptional skill characteristics in managing bond portfolios. Therefore, with this in mind, we would include investment houses such as M&G, Legal & General, Invesco Perpetual and Schroders.”
Despite this, Lowman admits to currently being underweight in bonds. However, he does have exposure to the M&G Optimal Income, Legal & General High Income, Invesco Perpetual Monthly Income and Schroders High Yield Opportunities funds.
Hidden dangers?
Darius McDermott, managing director of Chelsea Financial Services, admits to being surprised that three bond sectors made the top 10.
“Bond funds continue to be popular for income and diversification but they are also expensive (like equities), so perhaps they are being seen as a lower risk option in an increasingly expensive investment world,” he says.
“There are hidden dangers though. With yields so low, inflation creeping up and the possibility of interest rate rises, investors could see some capital losses.”
As a result, McDermott says, if you do invest in a bond fund, look to one with a decent yield to compensate for any price falls.
“Although it is in the Strategic Corporate Bond sector, I like GAM Star Credit Opportunities,” he says. “It invests mainly in investment grade corporate bonds so fits the bill and has a yield of 4.5%. Rathbone Ethical Bond is another option and has consistently had one of the higher yields in the corporate bond sector for a number of years. It is currently 3.9%.”
What do the bond managers say?
While the behaviour of financial markets has always been unpredictable, Karsten Bierre, lead portfolio manager of the Nordea – 1 Flexible Fixed Income Fund, says markets have been more resilient to changing news flow than usual.
“Events that would previously have prompted sell offs in both equities and bonds, such as elections and geopolitical conflicts, have stubbornly failed to move the needle on any asset class over the long term,” Bierre says. “Equity markets remain at historic highs, while high yield bond spreads are flirting with historic lows.”
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