Flexible bond funds have seen more than €9.4bn in net inflows in the first half of 2017. That’s already more than the €8.6bn in net inflows registered during the whole of 2016. Adn that was an all-time record at the time…
It’s not exactly clear where all this money is coming from, as inflows into unconstrained bond far outstrip net outflows from other bond funds, while equity and absolute return funds are also seeing overall net inflows. It’s therefore conceivable investors are shifting money from their cash accounts.
This trend is set to continue as the ECB is unlikely to raise interest rates in the foreseeable future. Expectations of an ECB rate hike are likely to hit unconstrained bond funds too, as these funds tend to have the bulk of their assets invested in investment-grade bonds, with sleeves allocated to high-yield and emerging market debt to find that bit of extra yield.
Usage of unconstrained bond funds varies greatly across Europe, according to Expert Investor data. The funds are most common among Southern European investors, with more than 90% of Spaniards using them. Nordic investors, however, are not familiar with flexible bond funds at all: less than 20% of Danish professional investors use these funds.
But there’s one thing unconstrained bond fund investors across Europe have in common: those intending to increase allocation outnumber those planning to decrease it in every country.
The asset management consultancy Cerulli also believes “the surge in demand for flexible bond funds is set to continue.” However, says its European directors Barbara Wall: “Managers may have to consider reducing fees, which range from 0.68% to 1.83%, to achieve competitive net returns and attract investors.” But in every European country, those intending to increase their allocation outnumber those planning to reduce exposure.
Managers of unconstrained bond funds have plenty opportunities to outperform however, thanks to the flexibility of the category. This suggests a manager’s talent is more important than the fees that are being charged.
“Despite having the lowest fee in the category, with a five-year annualized return of 1.61% the Kames Absolute Return bond fund has struggled to beat its cash+2% target,” notes Cerulli, adding: “The Jupiter Strategic Bond Fund, however, charges 1.48%, but was the best-performing European flexible fund over the past five years, with an annual return of 5.77%.”