UK investors piling into fixed income funds raises concerns

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The latest monthly Investment Association figures raise concerns that UK investors are piling into fixed income as bonds deliver record low yields, while rejecting UK equities despite the index’s international exposure and sterling weakness benefits.

Retail investors placed £18.4bn in UK-authorised funds in the first six months delivering record-breaking inflows, but safe haven assets, such as fixed income, mixed assets and money markets, dominated sales in June, attracting £1bn, £905m and £237m respectively.

In contrast, UK equities were sidelined with the UK All Companies sector suffering outflows of £486m.

Tilney Group managing director Jason Hollands says fixed income currently has a “deeply unappealing” risk-reward profile due to distortions from record low interest rates and repeated QE programmes.

“Yields on UK government bonds are very low, especially after inflation is factored in and there is very little, if any, margin of safety in bond market.

“Rates will not stay at these levels for ever and so those piling in now could end up staring at capital losses when policy normalisation is priced in.”

In contrast, retail investors are wary of UK equities, but Hollands warns the FTSE 100 in aggregate has more revenues exposure to emerging markets and Continental Europe than the UK.

Where listed companies are domiciled and where their underlying economic exposure actually is are two very different things, says Hollands.

“In fact the high exposure of UK equities to overseas markets means that some of the perceived negative outcomes of Brexit uncertainties, notably Sterling weakness, actually benefit UK-listed companies with international earnings.”

Tilney UK equity fund picks’ international exposure

Fund                                                                        

Est. Overseas Revenue

CF Lindsell Train UK Equity                                

70%

AXA Framlington UK Select Opportunities      

68%

JO Hambro UK Opportunities                             

67%

Threadneedle UK Equity Income            

64%

Evenlode Income                                                    

62%

Liontrust Special Situations                                

60%

Majedie UK Equity                                    

60%

Source: Tilney