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Stick with strategic as investors flee bonds

Investors are pulling out of bonds in droves in favour of equity funds, but advisers do not suggest you ditch bonds completely
August 7, 2013

Bond funds experienced their largest monthly redemptions on record as investors pulled out £624m in June 2013, reports the Investment Management Association (IMA), the trade body that represents asset managers.

"The highest ever net redemptions of fixed-income funds by retail investors may have been a response to anxieties about future tapering by the [US] Federal Reserve and other central banks," said Jonathan Lipkin, director of public policy at the IMA. "Net flows in June were instead driven by equity funds. In contrast to recent trends, investors showed a preference for UK equity funds, which saw the highest net retail sales since October 2006."

The three worst selling IMA fund sectors for June 2013 were also fixed income: Sterling Corporate Bond, Global Bonds and Sterling Strategic Bond.

"Quantitative easing, which involves huge bond buying programmes by the Federal Reserve and other central banks, has severely distorted prices in large parts of the fixed-income market, to the point where many bonds look expensive and offer yields that simply aren't attractive once inflation is factored in," said Jason Hollands, managing director at wealth adviser Bestinvest. "In particular, developed market government bonds, index-linked bonds and investment-grade corporate bonds look vulnerable as and when the markets finally decide that quantitative easing will come to an end. Investors are therefore right to wake up to the fact that so-called low-risk bonds will generate capital losses at some point."

However, advisers including Mr Hollands do not suggest you totally ditch bonds but rather get your exposure via strategic bond funds, which can invest across different types of fixed income and shorten their average duration, a way of minimising volatility. He rates highly IC Top 100 Funds Legal & General Dynamic Bond (GB00B1TWMJ68) and M&G Optimal Income (GB00B1H05049), as well as Kames Strategic Bond (GB0033988436) and TwentyFour Dynamic Bond (GB00B5LHHR01).

"These funds are generally running with quite short average durations of around two years, which should help reduce volatility," he says.

See more best bond funds for difficult times

Read the experts advice on whether to stay in large bond funds

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Strategic bond fund suggestions

FundYield (%)1 year total return (%)Total expense ratio (%)
Kames Strategic Bond2.937.141.31**
Legal & General Dynamic Bond Trust 4.148.011.42*
M&G Optimal Income2.869.111.41
TwentyFour Dynamic Bond 7.0312.291.41***

Source: Morningstar as at 7 August 2013, *Legal & General, **Kames, ***TwentyFour Asset Management.