Bonds fall from favour

Fund managers believe equities will outperform bonds over the next year – but retail investors are still flocking to corporate bond funds.

Nearly 90 per cent of fund managers surveyed by Chelsea Financial Services (CFS) this week expected equity returns to be higher than those on fixed-interest investment in the next 12 months. Half of the bond fund managers agreed that equities would do better than bonds.

Retail investors have piled into corporate bond funds in the past year, attracted by the higher yields they offer at a time when rates on savings accounts are close to zero.

Corporate bond funds were the most popular sector for new money from retail investors for the ninth consecutive month in July, according to the Investment Management Association – although equity funds did gain ground.

Advisers said that investors had already missed the bumper returns to be found on corporate bonds.

“The easy money has been made in bonds,” said Juliet Schooling Latter of CFS. “But the retail investor is looking at bonds as they can’t get income anywhere else.” Equity income funds are still only yielding about 4.5 per cent, according to Hargreaves Lansdown, while low-risk corporate bond funds yield 5.5 per cent on average.

There have also been concerns over the ability of some bonds to repay investors. This week, Royal Bank of Scotland was forbidden from repaying some of its subordinated debt.