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Fail safe?

The appetite for corporate bonds shows little sign of abating. Advisers accounted for four out of five bond funds sold in January which amounted to £1.4bn and 25 per cent of all fund sales.

Advisers might want to cast their eye over a chart from Skandia which highlights how its top selling funds in each year since 2000 have subsequently performed. It makes for grim reading with every fund except one having tanked. At the height of the technology boom in 2000, Henderson global technology reigned supreme. It has since fallen by 60 per cent.

In 2006/07, the commercial property phenomenon was in full swing and Norwich Union’s fund was the most popular. It is down by more than 30 per cent.

Yet many experts continue to believe that investment in high-quality bonds is a decent bet for this year. The arguments in favour are strong. Corporate bond markets typically recover before equities after times of economic woe. Bond prices are pricing in default rates of 35 to 40 per cent. Looking back over the years, the worst default rate for investment-grade bonds was 2.4 per cent.

Some bonds are yielding upwards of 8 per cent and a small narrowing of spreads will double the return. Unlike previous fads, investors are not piling into the funds because bond funds have made stupendous gains and they want to get a piece of the action but there small mutterings of a bond bubble and certainly some advisers are worried that some bond funds could be hampered by poor liquidity and defaults. Fund selection will be the key.

Funnily enough, if it is not bonds that investors are yearning for, then gold is not far behind. Go back to the Skandia table and the only time it would have paid to be fashionable was in 2003 when everybody rushed for gold as markets sunk to a new low. Then the investment of choice was BlackRock gold & general fund. Investors have seen the value of their investment rise by 150 per cent since.

The financial crisis has renewed interest in the classic safe haven. Volumes of trade in exchange traded funds hit record highs while one bullion dealer claimed to be taking in £1 of every £100 withdrawn from British banks (a record £2.3bn was withdrawn from our banks in January).

There have even been reports of gold coins running out, creating shortages as mints across the world struggle to meet the surge in demand.

Chartists will tell you that the price of gold tends to rise early in the year before falling back. It is a trend that hedge funds take part in although there have been signs that they have been dehedging. That suggests they reckon gold has further to go. Ian Henderson, the highly regarded manager of the JPM natural resources fund, is still bullish on gold.

When I spoke to a metals analyst recently in a bid to find a bear on gold, he said he could not help me. When I asked him if he knew of a gold pessimist, he said, rather worryingly: “I cannot think of one.”

It seems everyone is rushing for safer assets such as bonds and gold. Perhaps they should spare a thought for a post-Depression scribbling from John Maynard Keynes, the famous contrarian investor. In 1937, he wrote: “It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind.”

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

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As macro-economic news seems to move from bad to worse, investors’ confidence in the value of their investments has been tested, resulting in widespread sell-offs. The shortening of investment horizons that this implies is a cause for concern for AFI panellists.

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