We were somewhat surprised to read earlier this month that the most popular recipient of inflows during a record month for net retail sales of open-ended funds according to the Investment Association for September 2017, was the UK Strategic Bond sector.
Historically bonds have been something of a safe haven, an anchor of relative stability when investors are worried about the price prospects for risky assets. Unfortunately, quantitative easing (QE) has suppressed yields to unrealistic levels. By that I mean the defensive nature of bonds was that they offered a positive real yield (above inflation) as a reward to the bondholder. If you took on corporate credit risk, you were rewarded with a higher yield.
If you take the Bank of England’s target inflation rate of 2%, it’s actually 3% at present, you have to take on corporate credit risk and/or duration (interest rate) risk to get near a positive real yield and that would entail a fair amount of high yield or as it’s also known – Junk. Last week saw high yield spreads widen which appeared to unsettle investors in one of the leading US high yield passive vehicles as depicted by the outflows in the following graph.
Source: Bloomberg & The Wall Street Journal
So why the rush of money into Strategic Bonds in September? Perhaps investors have given up trying to allocate within debt/fixed income, recognising they need someone with that skill via a product. Of course it is just that, a product not a complete solution, a multi-asset debt or fixed income product. For many, Strategic Bond Funds have a relatively attractive yield, some have made that a focus to attract yield hungry investors. Be careful what you wish for, portraying an attractive yield probably means incurring a greater level of credit risk than investors might be comfortable with.
Why not go the full multi-asset route and choose a solution that offers a relevant investment outcome (above inflation). Of course we have one and many of you have invested in it and that seems to make more sense than trying to navigate a partial multi-asset allocation to bonds.