MONEY FLIES OUT OF BOND FUNDS AS BULL MARKET ENDS / THE FINANCIAL TIMES

Money flies out of bond funds as bull market ends

Some investors are pulling out but others will still relish a stable income

Owen Walker


Bond funds hoovered up cash for more than a third of a century as investors were drawn by their promise of modest, reliable returns that balanced out their allocations against more adventurous asset classes.

But as global monetary policy tightens and central banks promise further interest rate rises, many commentators have called the end of the 36-year bond bull market. The most popular fixed income funds are losing their lustre.

“Clearly market sentiment towards bonds has deteriorated,” said Andreas Utermann, chief executive of Allianz Global Investors, the €498bn fund house that has 40 per cent of its assets in fixed-income products. “Some investors who were in bond funds because they thought they were in a 30-year-plus bull market will pull out, but investing in bonds is also about receiving a stable income.

”Of the 20 funds with the biggest outflows in the US for the first three months of the year, nine were bond funds, with several others also investing in fixed-income assets, according to Morningstar.

The data provider’s list includes the $32bn iShares iBoxx dollar investment grade corporate bond ETF, which suffered $5.7bn of outflows; the $14bn iShares iBoxx dollar high yield corporate bond ETF, which lost $3.2bn in redemptions; and the SPDR Bloomberg Barclays high-yield bond ETF, from which investors withdrew $3.2bn.



Several large mutual funds also suffered heavy redemptions. Among them were Franklin Templeton’s $78bn income fund with $2bn of outflows; T Rowe Price’s $30bn new income fund, $2.5bn of outflows; and BlackRock’s $14.8bn high-yield bond portfolio, $1.9bn of outflows.

Detlef Glow, head of Emea research at Lipper, the data company, said it was no surprise that the biggest bond funds are among those suffering most from the turn in sentiment. “That’s the nature of the beast,” he said. “If you make the majority of the inflows, you will probably make the majority of the outflows.”

In Europe, more than half of the 20 biggest bleeders in the opening quarter were fixed income funds. The list includes Amundi’s €10.7bn 6 M fund, with €874m outflows, and Jupiter’s €9.5bn dynamic bond fund, with €1.3bn outflows. Europe’s biggest fund, Pimco’s €59bn GIS income fund, recorded inflows of €697m over the quarter but had outflows of €616m in February and €548m in March. The fund was Europe’s fastest-selling last year, attracting €41.5bn.

Dan Ivascyn, chief investment officer at Pimco, said he did not believe the tide has turned on his company’s flagship fund. “We don’t focus on flows other than to the extent that meeting the liquidity needs of our end investors is always of the utmost priority,” he said. “We think it’s a very attractive environment for these more flexible bond mandates — not just Pimco’s income fund but products that can take advantage of a global opportunity set, which is about $100tn in size.”



The income fund follows an unconstrained strategy, which means it is not confined to traditional bonds but can invest freely in assets as diverse as mortgages and higher yielding debt instruments.

Market volatility in the first couple of months of the year revealed that equity and bond prices were no longer negatively correlated. For three weeks running the S&P 500, the US stock market index, fell and the yield on the 10-year US Treasury note rose, sending bond prices lower. Investors had been used to equity and bond prices moving in opposite directions and positioned their portfolios accordingly. Commentators have said that inflationary pressures have brought an end to the inverse relationship, which has caused investors to reassess fixed income allocations.

Many of the funds being hit by big outflows have also suffered market losses. Franklin Templeton’s income fund, which bled $2bn of investor money, recorded a $2.4bn loss in the first three months, while iShares’ investment grade corporate bond ETF, which suffered $5.7bn of outflows, made a $1.3bn loss.

Large institutional investors have also suffered from underperformance of their fixed income holdings. For example, ATP, the Danish pension fund with $123bn of assets, saw its holding shrink 1 per cent in the first quarter, having risen 29.5 per cent in 2017. This was largely due to a €230m loss on its bond and mortgage investments. It was the first quarter in four years that the scheme had posted a negative return.



In announcing the results, Christian Hyldahl, chief executive of ATP, said: “In a difficult market, a negative return of 1 per cent for the first quarter of the year was satisfactory in light of the very high returns realised in 2017. The result indicates that returns are about to be normalised as central banks place a tighter hold on liquidity and ramp up interest rates.”

Bond funds were the fastest-growing asset class in Europe last year, attracting €289bn, according to Lipper. They are much less popular this year though. Bond products attracted just €10.8bn of new money in the first quarter, with €3bn of outflows in March. Beneath the overall figure, there is a wide dispersion in how different categories of fixed-income assets fared.

Investors have pulled billions of euros out of funds focused on developed market corporate bonds and moved into products investing in emerging market debt. US high yield and European corporate bond funds suffered the biggest outflows, at €7.5bn and €5.3bn respectively. At the other end of the spectrum, emerging market local currency and hard currency funds each scooped up €6.7bn.



“Increased volatility at a company level impacts the corporate bond side and there has been a shift into higher yielding safe havens as a result,” said Mr Glow. “Investors are not necessarily going out of the bond market altogether.”

Mr Utermann said that while some investors may have reduced their exposure to fixed income, others may be more attracted to the asset class. “While there might be a change in sentiment and outflows, I do not think rising yields mean that investing in bond funds is not an attractive proposition,” he said.

“There will be other people who sat on the side lines and now they are seeing yields rising they will move in. It would be facile to say that just because yields are rising it should result in big outflows. It might just mean there is a shift in who owns bond funds and their reasons for doing so.”