Investors Sell UK Equities and GARS for M&G Optimal Income

Investors were buying sterling strategic bonds and targeted absolute return funds, but shunned UK equities thanks to Brexit fears

David Brenchley 20 December, 2017 | 10:37AM

Investors favoured bond funds over UK-focused equities in 2017.

UK investors piled into bond funds and targeted absolute return strategies in 2017, while shunning UK-equity offerings, according to data from Morningstar Direct.

The Investment Association Sterling Strategic Bond sector was the most popular, seeing almost £6 billion of inflows year to date. Around £5 billion of that was ploughed into one fund in particular – Richard Woolnough’s Morningstar Silver rated M&G Optimal Income Fund.

The Unclassified sector was the second most-popular at £5.9 billion, with Targeted Absolute Return funds in third place being bankrolled to the tune of £4.3 billion. Again, the majority of the latter flowed into one fund – Invesco Perpetual Global Targeted Returns.

As well as taking first place in individual fund flows, M&G’s Global Floating Rate High Yield and Dynamic Allocation funds were third and fourth, with net inflows of £2.7 billion and £2.6 billion respectively. The Aviva Investors Multi-Strategy Target Return Fund rounded out the top five.

At the other end of the scale, the UK Equity Income and UK All Companies funds were the most unloved, with Brexit playing on investors’ minds. Those two sectors saw net outflows in 2017 of £3.3 billion and £2.5 billion respectively.

On an individual fund basis, the Morningstar Bronze rated SLI Global Absolute Return Strategies Fund was by far the least favoured, with net outflows totalling almost £5 billion. That was followed by the Morningstar Silver rated Stewart Investors Asia Pacific Leaders Fund with outflows of £1.7 billion.

After a trying year, Neil Woodford’s flagship CF Woodford Equity Income Fund and Mark Barnett’s Invesco Perpetual High Income also saw over £1 billion worth of outflows.

What Are Sterling Strategic Bond Funds?

Strategic bond strategies allow fund manager to invest more flexibly across the fixed income universe. They can invest in gilts, investment grade and high-yield bonds through to leveraged loans and convertibles; allocating where the manager sees best value.

As a result, for investors who wish to gain exposure to bonds, they can be a canny play. However, the popularity of bond funds with retail investors in general has baffled many analysts.

True, equity markets are in the eighth year of a bull run and valuations look pretty toppy. That might have led investors to seek safe haven assets in case a correction is around the corner.

But David Coombs, head of multi-asset investments at Rathbones, thinks bonds are “massively more expensive” than equities. “The real yields on sterling bond markets are negative to almost zero so you’re not being paid,” he told Morningstar. “From a multi-asset perspective, I just don’t feel the need to allocate capital to any of those asset classes.”

Year-to-date, the sterling strategic bond sector is one of the poorest performing, returning just 5.36% to 18 December. However, it’s one of the better fixed income sectors. Hence, if investors are worried a correction is around the corner, it’s one of the better safe-havens to be in.

But Coombs believes the amount of inflows into the funds is a by-product of clients being under-risked. “I think a lot of people are sitting in SIPPs and drawdown with 20-year time horizons who have got too much in bonds and probably should stomach more volatility.”

Bonds have generally had a good run in recent years and, thanks to quantitative easing programmes, investors have been able to gain decent returns without taking risk. “I think we’re in a very different place today,” Coombs counters. “Bond markets have done next to nothing this year and I suspect next year will be the same, at best.”

M&G Optimal Income has only slightly outperformed its sector, with gains year-to-date of 5.72%, which puts it in the third quartile in that period.

Jason Hollands, managing director at Tilney Group, thnks that, due to pricing in bond markets being “arguably more extreme than the stock market”, cautious investors would be better off looking towards absolute return funds.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk