Managers struggle to cope with inflows to fixed income funds
Assets are flooding into the fixed income sector as investors search for yield in an environment of low interest rates. But this popularity is pushing yields to record lows, forcing fixed income managers to adopt a variety of tactics to meet their targets.
Research from Bank of America Merrill Lynch in June shows fixed income funds received $540bn inflows since the start of 2009, and in 2010 took in more new business than they had between 2003 and 2008. This helped push yields to record lows, the bank said.
For European bond investors targeting yield, including institutional ‘forced buyers’, the past few years have been difficult. In June, yields on 10-year US Treasuries hit 1.45%. In the UK, fixed income assets have increased by around 11.5% annually in the period from June 2009 to June 2012, according to the UK’s Investment Management Association.
Over the long term, such yields make little investment sense. Morten Spenner, chief executive of fund of hedge funds International Asset Management, said: “At some point there has to be a running out of patience. Investors will not want [Bunds at low yield] and there is then a tremendous change in dynamics. But pension funds are asking, what they should do, to meet their goals?
Buying assets for 10 years yielding 1.4% per annum is clearly not sustainable. As a result, many investors have turned to credit. In the UK, Richard Woolnough, manager of the M&G Strategic Corporate Bond (£5.16bn AUM) and Corporate Bond funds (£6.31bn AUM), was concerned that further asset growth would start to limit his ability to manage the portfolios most effectively.
S&P Capital IQ, in its latest report, says: “His response was to add value through stock selection. M&G has tried to limit flows into these funds by persuasion rather than closing the vehicles.”
Invesco Perpetual has made no such move for Paul Read and Paul Causer’s Corporate Bond Fund, which held £5.5bn as at the end of June. S&P Capital IQ says “the managers feel their investment process is successful in both large and small funds. As contrarian investors, they have been able to find liquidity when needed, and funded their recent redemptions smoothly.”