Should you invest in fixed income?

Published by Rob Griffin on 23 September 2015.
Last updated on 23 September 2015

finance cogs

Investment Association statistics illustrate the point with the data revealing they were the worst-selling area for the second consecutive month in June with a net retail outflow of £198 million - the largest outflow since January 2014 when net retail sales were £298 million.

Overall, around £6 billion has been withdrawn from fixed-income funds over the course of 2015, and this has largely been down to investor concerns, according to Ant Gillham, manager of the Old Mutual Voyager Strategic Bond fund.

"Investors have enjoyed uniformly good returns from fixed income since the financial crisis but, unusually, the first half of 2015 has seen both government bonds and credit perform poorly," he explains. "Investors are used to having either credit or government bonds performing well at any one time but this hasn't been the case."

Patrick Connolly, a certified financial planner at Chase de Vere, believes many investors are also worried that fixed interest is overpriced and could be badly hit should interest rates start to rise. As a result, they have been considering other options.

"Instead of using fixed interest to provide protection portfolios, they're looking at cash, absolute return funds and alternatives," he says. "However, fixed-interest investments, such as gilts and corporate bonds, should have a place in most investment portfolios."

Generally seen as lower-risk than shares, although this will depend on the nature of the investment being made, a bond is an IOU whereby the issuer promises to pay back your capital at an agreed date, as well as a set amount of income every year until repayment.

Connolly suggests they are particularly suited to more cautious investors, including people near or in retirement, as well as those who have significant investment portfolios and want to enjoy some protection against stock market falls.

"These people often want to take less risk with their investments, perhaps because they are relying on this money to provide them with an income, or because they aren't able to earn extra money to compensate for any investment losses," he adds.

For fixed-income investors there are seven Investment Association sectors to consider: UK Index Linked Gilts; UK Gilts, Global Bonds, Sterling Strategic Bond; Sterling High Yield; Sterling Corporate Bond; and Global Emerging Markets Bond.

Within these sectors there is a very wide range of fixed-interest investment funds, many of which adopt different approaches. This means they can vary considerably in terms of the amount of freedom given to the manager, assets owned, where they invest geographically, the number of holdings, and the term remaining of individual holdings (duration).

It is important to remember that while investors want to achieve the best possible return, fixed interest is usually held to provide protection and diversification alongside growth assets such as shares and property. So which part of this market is most attractive?

Is this the right sector for me?

Consider investing in this sector if...

  • you want a one-stop-shop approach to fixed-income investing
  • you want a fund that can switch between fixed-income areas
  • you are looking to diversify your portfolio


It's quite a conundrum, acknowledges Ben Willis, head of research at Whitechurch Securities, who has a negative stance on government bonds, as yields remain historically narrow at a time when there are question marks over when interest rates will rise.

"We continue to largely avoid conventional government and high-quality bonds, where we see little medium-term value and potential for capital losses," he says. "Our bond exposure will continue to focus on corporate debt."

Diane Weitz, a director and financial planner at Ashlea Financial Planning, suggests taking a look at strategic bond funds, such as the PFS Twentyfour Dynamic Bond, as these products enjoy much greater freedom to switch between different types of credit, depending on the economic backdrop.

"I quite like these funds, as they have the opportunity to invest globally and in different elements of the bond market," she says.

Mark Dampier, head of research at Hargreaves Lansdown, agrees they are worth considering but warns against being overly optimistic about their prospects. Investors, he suggests, must closely examine portfolios to ensure they understand the aims and objectives.

"These funds make sense because they have plenty of ammunition to help if things go badly wrong but their performance will always still depend on the fund managers and they don't always make the right decisions," he says.

How much exposure you want to fixed income will also depend on your economic outlook for the coming year and what you expect to happen to interest rates, as movements can have a dramatic impact on bonds.

It's a point echoed by David Coombs, head of multi-asset investments at Rathbones. "If rates rise faster than expected, then returns could be hit very hard, particularly in high yield where liquidity risk is underestimated."

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