Continued bond fund sales add to bubble fears

Investors continue to pour money into bond funds despite the growing concerns of a potential bubble forming in the asset class.

According to data from Cofunds Institutional, four out of the top 10 funds that wealth managers bought in August on behalf of their clients were were fixed income, or bond, portfolios.

The top three best sellers were the Legal & General Dynamic Bond fund, followed by the M&G Corporate Bond and Invesco Perpetual Corporate Bond funds. The M&G Strategic Corporate Bond fund claimed tenth position. However, not all investors are backing bonds, with Thames River Capital’s Gary Potter going light on fixed income stocks across his range of multi-manager funds (funds that invest in other funds). This is due to his concerns the asset class could be entering bubble territory.

Debate over bonds has raged recently. Last week the price of UK government bonds soared to a new high after the Bank of England hinted that it could resume buying back gilts as part of efforts to stimulate the economy. There are fears that this could push bonds to unsustainable peaks. A collapse in gilts would drag down corporate bonds issued by companies, exacerbating concerns. It is tricky argument to get right as there are genuine reasons to be concerned about the economy and therefore to hold fixed interest stocks like bonds.

Potter said: ‘A lot is in the price. When people tell me bonds are the only game in town it reminds me of what I heard in 2000 and 2001 when everyone said equities [shares] were the only game in town.'

‘I think there is some value left in high yield [bonds paying higher rates of interest because the issuing company is a higher than average credit risk], but if there is a market or interest rate shock this could back up. You can now buy equity funds which are yielding more than bonds on a 10-year basis. When a lot of investors are chasing one asset class, I would hesitate as there could be a bubble forming,’ said Potter.

However Chris Mayo, head of investments at Fund Intelligence, a discretionary fund manager in Kent, is less negative on the trend towards bonds.

‘We are not overly worried. I think there would be a problem if interest rates rise rapidly, but we don’t think this will be a scenario we are going to see,’ he said.

UK equity funds also featured prominently during August, with Citywire A-rated Mark Barnett’s Invesco Perpetual UK Strategic Income in fifth position, while the Threadneedle UK Mid 250 fund, managed by Simon Haines, saw the sixth largest volumes during the month.

Top 10 bestselling funds (via wealth managers)

1) Legal & General Dynamic Bond
2) M&G Corporate Bond
3) Invesco Perpetual Corporate Bond
4) Aberdeen Asia Pacific
5) Invesco Perpetual UK Strategic Income
6) Threadneedle UK Mid 250
7) SLI [Stanard Life Investments] Global Absolute Return Strategies
8) Threadneedle UK Equity Income
9) SLI UK Smaller Companies
10) M&G Strategic Corporate Bond

Source: Cofunds Institutional