September 4, 2012 4:35 pm

Bond funds – the awakening

Sleepy corner of investment universe has become fashionable
Barclays bond indices

It is Tuesday, so it must be time for a new fixed income fund. Man Group is one the latest, having launched a $50m hedge fund recently which trades bond futures and other derivatives. It hopes that the fund, which is driven by computer algorithms with the help of a manager, can eventually reach $1bn. Others asset managers have also been piling in to the sector – BlackRock and Axa are among those to start fixed income funds of one sort of another this year.

And the launches are becoming increasingly imaginative. ECM Asset Management has created a fund that will invest in both loans and bonds. M&G in 2010 launched an inflation-linked corporate bond fund. And Barings is one of the many fund managers hawking around emerging markets debt funds. According to data from Lipper, there were over 600 bond funds launched in Europe in 2010 and 2011, while launches so far this year have outpaced launches of equity funds. A once sleepy corner of investment universe has become fashionable.

Like all good business propositions, the fund launches are a reaction to rising demand. In the UK, for example, bonds have been the most popular fund class for retail investors for the past eight months, according to the Investment Management Association. Around the world, pension funds are turning to fixed income as they seek to match assets with liabilities.

In return for their enthusiasm, investors fleeing equity market volatility have been rewarded with stable, if uninspiring, returns. The Barclays Global Aggregate Bond index returned 5.5 per cent in 2010 and 2011, and 3.6 per cent so far this year, with the more spectacular returns coming from the higher yield areas of the market. There is no reason to expect an imminent collapse in bond prices: Japanese government bond yields, for example, have remained at 2 per cent or below since 1998. But a glut of new bond launches is rarely a bullish sign. Just ask anyone who bought tech funds in 1999, or property funds in 2007.

Email the Lex team in confidence at lex@ft.com

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