Fixed income was thoroughly in favour over the summer — the only asset class to have two consecutive months of inflows.
Data from Morningstar shows that retail investors pumped £698 million into fixed income funds in July, pushing the total invested into the sector this year to £2.85 billion. In June, £838 million was invested in the sector.
Bonds have become popular with investors this year. Prices crashed at the end of last year, pushing up yields and offering investors palatable returns after a decade of low bond yields.
As yields moved skyward, investors could get good returns without taking the level of risk associated with the stock market.
In a further breakdown of the data, Morningstar said that the most popular type of bond fund was global corporate bonds, with £546 million invested in these funds in July. The next favourite was UK government bond funds at £279 million.
“The current yields and future capital growth potential is as good a mixture as we’ve seen in well over a decade,” said Tim Morris, from Russell and Co Financial Advisers.
“I’ve heard a lot of fund managers enthuse about the current opportunity in bonds — from unusual short-term trading to those who see reducing inflation and low growth as an ideal environment for bonds to flourish.
“In my opinion, bonds are back. In fact, if I wanted to be controversial, I’d say a 60-40 portfolio could be a good way to go, especially as very few clients have the risk profile and capacity for loss of a portfolio predominantly made up of equities.”
As central banks hint that they are reaching the peak of interest rates, bonds may become more attractive.
One disadvantage of fixed income is that if interest rates move higher, the yield offered on your bond will be lower than the market rate (and so the price will fall, pushing up the yield to match the new, higher rate). But if rates are likely to be steady or even move lower over the next year, there is less risk of this.
“Bonds may suddenly look like they could provide protection, income and possibly substantial capital returns,” said Tom Sparke from the discretionary fund manager GDIM. “This does, however, come with the prospect that the factors that move bond valuations upward will also move equities upward too.”
Across June and July, spooked investors pulled money from the stock market. In June, £3.77 billion was pulled from equity funds — the highest since September 2022 — while £2.3 billion was withdrawn in July.
The funds most affected included Royal London’s UK Core Equity Tilt Fund, Vanguard’s US Equity Index fund and Schroders’ Diversified Growth Fund.
Imogen Tew is a freelance financial journalist
