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Tread carefully with bond funds

Bond funds can offer diversification and income but face a number of risks
Tread carefully with bond funds

The high risk, high return nature of equity investing means that stock markets tend to drive the bulk of performance in many portfolios. So investors seeking growth often allocate heavily to equities at the expense of other investments. But this year many investors have reduced their equity exposure even though stock markets have made substantial gains. UK investors, for example, withdrew more than £2bn from equity funds on a net basis in the first half of 2019 and, by contrast, put nearly £6bn into bond funds.

Fixed income investors have been rewarded with strong returns lately, with government bonds performing well late last year while equity markets struggled. They have also generated strong returns this year as investors worry about challenges facing the global economy such as trade wars and slowing growth, and look for a safe place to park their money. “The cyclical slowdown and a wall of political worries have created a surge in demand for safe assets," explains Chris Iggo, chief investment officer for fixed income at AXA Investment Managers. "Investors are trying to figure out what it all means. Will there be a US recession? Will there be a bear market?”

Conditions have also improved for the asset class more generally. Just a year ago central banks appeared set on increasing interest rates and bonds tend to perform badly when rates go up, in part because it makes the yields they offer less attractive. But growth concerns have forced central banks to change tack and the US Federal Reserve made its first rate cut in a decade at the end of July.

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