People have been calling the end of the bond bull market for most of 2013 and with equities performing strongly at the start of this year you can understand why talk of the Great Rotation has gathered speed.
Bonds have really been under pressure since US Federal Reserve Chairman Ben Bernanke suggested quantitative easing in the US could be tapered later this year. The result was investors panicking about a rise in interest rates – not good news for bonds.
Bonds as an asset class have been out of favour for the past 12 months, but Bernanke’s comment acted as a catalyst for change. In June 2013, the Investment Management Association reported £624m net redemptions of fixed income funds by retail investors – the highest monthly outflow since records started in 1992.
However with the baby boomers approaching retirement and concerns around large allocations to volatile equities, risk and remuneration all factored there will still be demand for an income source that offers better than cash?
Everyone knows interest rates will eventually rise but with Bank of England governor Mark Carney suggesting that the BoE will not consider raising rates until the jobless rate has fallen to 7% or below in the UK it means there is still some time left to find value in the bond markets.
Where investors look is the key question. Sovereign debt does not yield much but there is still value in corporate bonds compared to cash returns. There may also be scope for high yield.
Most flows are likely to go the way of strategic bond funds which can invest across the bond market and make use of wider powers.
In the future I believe picking the right fund manager will never be more important. The days of easy wins is over, the “once in a generation” time for the bond market has come and gone. Expect wide differences between the best and worst performing funds regardless of sector.
The easy win is over in bonds, those wishing to continue investing in the asset class will need to choose managers with proven track records and a proven ability to sidestep disasters.