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Adviser Fund Index

The surge of retail money which began flowing into corporate bonds towards the end of 2008 shows little sign of going into reverse.

According to data published by Cofunds, the asset class continues to dominate its sales charts and corporate bond funds accounted for about a quarter of the platform’s net sales in May.

M&G strategic corporate bond topped the Cofunds list, followed by M&G corporate bond and Invesco Perpetual corporate bond.

Indeed, funds managed by M&G and Invesco proved so popular that the two firms alone generated about 60 per cent of the platform’s inflows last month.

Investment Management Association statistics show that the sterling corporate bond sector generated the biggest net retail inflows in every month from November 2008 to April 2009. The peer group accounted for almost £700m in retail inflows in April – about one-third of total net retail fund sales.

The asset class also proved popular during last month’s Adviser Fund Index rebalancing. Fixed income weightings in the AFI aggressive, balanced and cautious indices rose by one, two and four percentage points respectively.

As a result, the bond allocation in the cautious benchmark overtook that of equities for the first time.

However, Chelsea Financial Services managing director and AFI panelist Darius McDermott kept his bond weightings at 20 and 30 per cent in the balanced and cautious indices. Both allocations are about 10 percentage points lower than the aggregated fixed income weighting in each benchmark.

McDermott says that though corporate bonds offer value, he is sticking to a 100 per cent equity allocation in the aggressive index because shares have further to rebound.

“We have made no great feature of corporate bonds. Our biggest seller in the first quarter was Neil Woodford [manager of Invesco Perpetual’s equity income funds] – he tends to dominate our sales every year.”

Bestinvest senior investment adviser Adrian Lowcock is also less enthusiastic on the asset class than some commentators: “We increased our exposure to corporate bonds in October when they looked better value than equities on a risk-return basis.” he explains.

“There is still some way for prices to recover, but our exposure has not really changed since then.”

While he favours equities in terms of potential capital gains, McDermott acknowledges that bonds also serve an important role in generating income. “The average bank account is chucking out about 1.5 per cent,” he says. “With corporate bonds you could be getting 6 to 8 per cent. It is an income story as much as it is a capital story.”

A total of 25 funds from the IMA’s global bonds, sterling corporate bond, sterling high yield, sterling strategic bond, UK gilts and UK index linked gilts sectors feature in the AFI indices.

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