The turmoil on the bond markets both in the US and the UK has eroded investor confidence.
The yield on US Treasuries 30-years reached its highest level in 16 years this week, as the markets digested higher interest rates and longer government borrowing.
Investment Association figures show that retail investors withdrew a net £356mn in August from fixed income funds. Calastone, a fund network, also recorded an outflow of £330mn in bond funds during August. This was followed by £128mn in September.
Edward Glyn is the head of global markets for Calastone. He said that the bond markets were in charge at the moment. “A bond market rally can be caused by inflation that is better than expected, or central banks pausing interest rate hikes. . . The next moment policymakers [warn] rates will remain high for a long time, bond yields are surging and equity markets are sagging.” The trend was compounded by investors continuing to seek refuge in ultra-safe money market funds, which had net inflows of £862mn across August and September, according to Calastone.
Calastone figures are not exhaustive but they are seen by many as a good snapshot of the investment fund flows. The figures suggest that pressure to sell from UK funds is continuing with £448mn in outflows only in September, while global fund inflows were close to £1bn.
Calastone data shows that retail investors in other countries continue to shift away from actively-managed funds and towards passive index funds. This is particularly true for global equity index funds.
Since the beginning of the year, active funds have seen retail outflows of £7bn while passive funds saw a gain of £5.4bn.
Global equity funds, especially passive funds, are popular because they provide an instant, easy cross-market exposure on a market in which making a tactical decision is difficult, said Emma Wall. She is the head of investment research and analysis at Hargreaves Lansdown.
Money market funds such as Royal London short-term money market and Abrdn Sterling money market were among the most popular funds purchased on Hargreaves Lansdown during August. International indices such as the Legal & General US Index were also popular.
Many warn that a short-term correction of the bond market is possible, and this will have an effect on the equity markets.
In a note about European stocks, Bank of America analysts said that a renewed decline in bond yields would boost the equities. However, they cautioned that its full effect would depend on macroeconomic conditions underlying falling bond yields.
Wall of Hargreaves said that it is likely that equity markets will rebalance over the next year, and yields will drop, while bond prices will increase.
It is important to diversify across asset classes and geographical areas, as this will allow investors to be prepared for any future market scenarios.