Europeans prefer bonds as cash pours into funds

Investors are set to pour a record amount of cash into bond funds in Europe this year despite mounting concern over an imminent rise in interest rates in some countries.

Data from fund research firm Lipper reveal that individuals and pension funds invested €114 billion (£91 billion) in bond funds in the first six months, nearly double that going into equity funds.

Lipper said that bond fund flows “appear to be on track to surpass 2012’s bumper year” in which €233 billion was invested. The previous peak was reached in 2005, when bond funds saw inflows of €150 billion.

“I’m amazed at how resilient the flows have been,” said Jake Moeller, head of UK and Ireland research at Lipper. He said much of the concern over a rise in interest rates has “been factored in” and that the pace of bond fund sales would probably continue this year unabated — unless there is a significant “economic shock”.

Spanish investors poured in the most, at €12.7 billion, which Moeller said was because of low interest rates fuelling the hunt for income. Yields on Spanish 10-year government bonds fell to euro-era lows of 2.39 per cent recently, amid buying by Eurozone banks.

Lipper’s data also show sales of bond funds at €9.2 billion in Norway but just €4 billion in the UK. Investor appetite for safe assets and fixed interest payments, along with requirements upon pensions to hold certain types of assets, are helping to buoy European demand for bonds.

The prospect of interest rate rises is also more remote in the Eurozone, where the main lending rate was cut as recently as June, than in the UK.

Among the best-selling bond funds in Europe is the M & G Optimal Income fund, one of the largest, housing £22.3 billion in assets.

Moeller said such “strategic” bond funds were popular, as their managers had the flexibility to invest across the fixed-income spectrum and even hold a portion of assets in equities.

A spokesperson for fund manager Henderson said flexible mandates were more suitable for the current environment than those investing in only one type of bond.

“Strategic bond funds are able to provide this flexibility while still offering an income for underlying investors,” he said.

He also noted that investors were well aware of the risks of capital erosion; strategic bond funds, in theory, are able to provide a better balance of income and capital preservation at different parts of the economic cycle.

Tom Becket, chief investment officer at PSigma Investment Management, noted that there would “always be a strong appetite” for fixed income investments “regardless of how low yields are”, because certain investors have to hold a portion in bonds.

“In a world where interest rates are to going to go up gradually, corporate bond yields are still quite attractive,” he added, especially given the recent drop in European government bond yields. German 10-year Bunds, for example, fell below 1 per cent in mid-August.

However, the City watchdog recently warned investors about the liquidity risks of investing in corporate bond funds. Regulators fear that a rush for the exit could leave some managers unable to meet investors’ redemption requests.

— Financial Times