The Sterling Strategic Bond sector led £164m ($212.9m, €184.5m) net retail outflows from fixed income in August as investors turned to risk-off areas of the market.
The sector lost £303.9m over the month, according to the latest Investment Association figures. It was the worst fixed income sector for sales and lagged behind all other asset classes apart from the UK All Companies and Specialist sectors.
In contrast, the Sterling Corporate Bond sector was one of the best sellers netting £126.5m. UK Gilts enjoyed £92.5m net flows and Global Bonds landed £81.5m. The Global equities sector was the best selling overall netting £417m.
Worst selling Investment Association sectors for August 2018
| Sector | Net retail sales |
| UK All Companies | -£355.8m |
| Specialist | -£331.1m |
| £ Strategic Bond | -£303.9m |
| Europe ex UK | -£258.4m |
| Targeted Absolute Return | -£165.4m |
Source: Investment Association
Brexit, trade and Bank of England it sentiment
Fixed income funds have pulled in £13bn since the Brexit referendum in June 2016, but investors are now getting jittery about the Bank of England raising rates, said AJ Bell personal finance analyst Laura Suter. The net £217m pulled from funds across asset classes shows just how nervous investors are, Suter added. It was the first net retail outflows suffered since the Brexit vote.
The US and China trade war, Brexit negotiations and an emerging market sell-off had also contributed to negative sentiment during the month, said Tilney managing director Jason Hollands. “Layered on to which of late has been the recent tenth anniversary of the collapse of Lehman Brothers, providing a timely platform for bearish commentators, to preach gloom,” Hollands added.
Emerging market debt sell-off
The risk-off environment was likely behind the switch in fixed income allocations, said Willis Owen head of personal investing Adrian Lowcock.
“Corporate bonds are generally less risky because they only invest in the lower risk area of the market. They have very limited high yield exposure. Whereas Strategic Bond funds can do anything and go anywhere. That adds a bit more potential risk to the portfolio,” Lowcock told our sister publication Portfolio Adviser.
Despite this the Global Emerging Market Bond sector edged its way into net inflows for the month pulling in £16m.
Lowcock attributed the minor net inflows to Global Emerging Market Bonds being a niche sector that attracts investors who see a buying opportunity in a market sell-off.
Tactical fixed income allocations
In contrast, Lowcock said Sterling Corporate Bonds, Sterling Strategic Bonds and UK Gilts were more mainstream fixed income sectors and the large flows in and out of them made them a better sentiment measure for the broader market.
Active discretionary managers have likely driven the flows between the Sterling Strategic and Sterling Corporate sectors rather than private investors, he said.
“Theoretically, Strategic Bond funds can do anything a Corporate Bond fund can do. Once you’ve appointed the manager and you like them, they can do whatever they think is appropriate. If you’re trying to be tactical and reacting to the short-term trend you might be trading between the two.”
For the same period last year, Sterling Strategic Bond was the top selling sector for retail investors netting £1.1bn of inflows.
The £1.3bn Artemis Strategic Bond, managed by James Foster and Alex Ralph, was a high-conviction fund that changes significantly according to the co-managers’ view of the bond market and would be suitable for the current market environment, he said. In the Sterling Corporate Bond sector, he said he likes the £1.5bn Kames Investment Grade Bond, managed by Stephen Snowden and Euan McNeal.
Net retail sales for the fixed income sector in August 2018
| Fixed income sector | Net retail sales |
| £ Corporate Bond | £126m |
| £ High Yield | -£81m |
| £ Strategic Bond | £303.9m |
| Global Bonds | £82m |
| Global Emerging Market Bonds | £16m |
| UK Gilts | £92m` |
| UK Index Linked Gilts | -£60m |
| Unclassified sector | -£36m |
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