Data published last week by the Investment Management Association made worrying reading for managers in the sterling corporate bond sector. After record inflows in 2009, the news that retail investors withdrew £228m from the peer group in January marked a sharp fall in appetite
and was the biggest monthly outflow so far.
The figure contrasts starkly with January 2009, when more than £1bn flowed into the sector, as investors responded to pricing anomalies in thecorporate bond market – the result of forced selling from institutions and extreme risk aversion in the fourth quarter of 2008.
Press releases in early 2009 touted once-ina- lifetime opportunities as markets priced in a downturn worse than the Great Depression.Investment-grade corporate bonds appeared particularly attractive for income-starved investors, offering attractive yields and the potential for capital appreciation, with a limited risk of defaults.
According to the IMA, almost £1 in every £4 of retail money went into sterling corporate bond funds in 2009. By the end of the year the sector had taken in £6bn, leaving the secondmost popular peer group, absolute return, trailing in its wake with a net retail inflow of £2.5bn.
However, signs that appetite for sterling corporate bond funds was beginning to wane appeared in the second half of 2009, as monthly retail inflows slowed and then turned to outflows in October and November. Last week’s data saw the peer group suffer the ignominy of being labelled the least popular retail IMA sector.
Chelsea Financial Services managing director and AFI panellist Darius McDermott says just one sterling corporate bond fund, Aegon investment-grade bond, appears on his firm’s buylist. McDermott is more interested in the IMA’s sterling strategic bond sector.
“Last year we promoted strategic bond funds,” says McDermott. “They have access to a greater weighting in high yield, which we prefer, and
have performed better than investment-grade funds over the last year. Strategic bonds are able to protect capital against interest rate rises.”
However, Dennehy Weller managing director Brian Dennehy favours the New Star sterling bond, which sits in the sterling corporate bond
sector, high-yielding funds run by Henderson New Star’s James Gledhill and global funds managed by GLG and Newton. Dennehy says the sterling corporate bond sector remains popular among retail investors and that IMA statistics may be misleading.
“Bond selling in January was dictated by non-Isa sales sources, which is dominated by funds of funds, discretionaries, etc – not what we might call real retail investors,” says Dennehy. “The same people would have been switching some money into property – real retail investors have not been doing this.”