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Strategic bond fund flows booming as investors are spooked by potential tapering of QE


Quarter two net sales for the Skandia Investment Solutions platform show a surge in UK fixed interest funds relative to other asset classes.

The proportion of net fund flows into the sector as a percentage of total net flows has grown from just under eight per cent in Q1 to over 14 per cent in Q2 buying behaviour within the fixed interest sector has changed dramatically with the potential tapering of quantitative easing in the US impacting investor confidence in traditional fixed income favourites.
To avoid potential losses from rising gilt yields, investors are looking to move away from gilts and corporate bonds in favour of strategic bond funds, cash and money market funds. Strategic bond funds are increasing in popularity as these portfolios typically have the flexibility to navigate increasingly volatile fixed income markets.
Multi-asset funds continued to be popular although, on a relative basis, the share of net flows into the sector fell as investors’ desire to reposition their fixed income portfolios and gain exposure to equity markets dominated. The UK equity sector has remained consistently popular since the start of the year, and the global specialist sector continues to be a popular sector for those looking to diversify their portfolio. 
Within equities, UK equities continue to dominate net equity fund flows. However, during the second quarter of the year there has been a marked pick-up in flows into North American and Japanese funds, whereas emerging markets and the Far East lost ground relatively. Within Asia the underperformance of the Chinese stock market, concerns about the Chinese banking sector, and lacklustre growth readings, have driven investors to withdraw from China orientated funds.
Despite the emerging market sector seeing a sharp drop in flows over the quarter, First State Global Emerging Market Leaders still headed the net fund flow table (ahead of First State’s introduction of an initial charge on the fund later this year to protect the interests of existing investors). Three UK fixed interest funds appeared in the top 10, two of which are strategic bonds; Fidelity strategic bond and the Jupiter strategic bond.  This compares with just one UK fixed interest fund in the first quarter of the year.
James Millard (pictured), director of investments at Skandia, says: “We are seeing a clear shift in the bond buying habits of investors. Strategic bond and global bond funds now dominate fund flows at the expense of gilt and corporate bond funds. This is largely due to Fed tapering becoming increasingly likely and bond yields rising over Q2.  Equities continued to be popular as markets rose over most of this period, with Abenomics helping to spur the demand for Japanese equities before the retracement in the Nikkei, and the relatively strong economic results for the US attracting flows.”

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