Fixed Income

In 2023, the money market and fixed income asset classes saw inflows whilst every other asset class was in outflow. Bond funds attracted £720 million - the most attractive sectors were government bonds and UK gilts. To simplify the wide array of bond funds, in chart 6 we have grouped the net retail sales of the IA fixed income sectors by credit risk,

Government bond funds, including the UK Gilts sector, alongside the Global, USD and Euro Government Bond sectors took in a combined £4.0 billion from retail investors over 2023 making them the most popular fixed income funds. The preference for government bonds in 2023 suggests a level of risk aversion amongst investors and may also have been driven by high yields. Government bonds are seen as being among the safest assets and although they did lose value in 2022 as interest rates rose rapidly (bond prices moving inversely to yields/interest rates), that concern faded in 2023 as interest rates reached their apparent peaks. Corporate bond funds meanwhile saw inconsistent flows month-on-month for a minimal £41 million inflows through 2023, while mixed bond funds saw heavy outflows of £2.3 billion.

Emerging markets funds saw inflows of £691 million, through the year, though these were heavily concentrated to the first half, while the more niche funds in the high yield sectors saw outflows of £369 million. With attractive yields available on corporate and government debt, and with concern over a ‘hard landing’ – a recession triggered by higher rates, High Yield funds with a higher chance of defaults have not appealed to investors.

Inflows to fixed income funds have continued in the first quarter of 2024 with net retail sales of £163 million. We do observe a shift in investor preferences, however.

Towards corporate bonds. Inflows to funds across all currency denominations has been £1.2 billion in Q1, after a flat 2023 where inflows were just £41 million. To the extent that 2023 preferences for government debt suggest a risk-off attitude, the shift towards corporate bonds in 2024 suggests increasing investor confidence, and therefore willingness to take on more risk. Additionally, a slight reduction in yields on bonds towards the end of 2023 may have increased the relative appeal of corporate bonds.