Following analysis of recent net inflows to short term bond funds, the Swedish Investment Fund Association (Fondbolagens förening) has issued a note about the reasons why such funds have a place in investors’ portfolios.
Firstly, it notes that October saw some SEK14.8bn (€1.44bn) in net inflows to short term bond funds as money was removed from equity funds. However, the proportion of total industry AUM in short term bond funds remains low compared to earlier periods.
A large share of the net inflows are likely the result of corporate decisions; for companies seeking low risk this represents a good option, Sifa suggests. The Swedish central bank’s negative interest rates meant that businesses lose money on their deposits. This does not affect individuals, where interest rates for most bank accounts remains zero – but companies must pay the actual interest rate.
Another share is invested in context of unit-linked insurance products. Here, short term bond funds constitute an “excellent” building block for managing risk. For example, a common use is to increase the share of bond funds as a person near retirement and wishes to reduce risk. It can also be a way to reduce risk in periods of stock market turbulence, Sifa notes.
Regarding individual investors approaching short term bond funds, it says the most recent industry data suggests this type of investor has been seeking to offset stock market swings. However, those seeking bond funds with increased credit risk to improve returns should also look to the related fees, the Association adds.
Still, despite the interest shown in the asset class, the October 2018 industry figures suggest short term bond funds made up just 6% of the industry total assets. That is far lower than the average recorded in the 2000-2010 period of some 14%, while the average for the period 2011-2017 was 9% – reflecting the ongoing search for higher reward/risk profiles.