Bond Fund Inflows Rebound on Low Growth and Inflation

It's turned out to be a ripe old year for fixed income funds, according to strategists at Bank of America Merrill Lynch. Fund data for the year so far show that investors piled into investment-grade bonds and government debt in the face of falling global growth prospects and inflation rates.

Government bonds funds saw inflows of almost 20% of asset under management in a trend the BAML strategists characterized as “into deflation, out of inflation”. Inflows into healthcare and utilities stocks and moves away from inflation-linked bonds, bank loans and energy-rich emerging-market countries further bolstered this trend.

“Investors and policymakers have been forced to reconsider their views on cyclical vs. structural in the global economy,” HSBC’s multi-asset strategists noted in a report published last week. “It is these discussions that have led to bond yields heading lower rather than higher, negatively affecting investors’ returns along the way.”

In total, fixed income funds have seen inflows of $152 billion, according to BAML, after a $91 billion outflow in 2013 following the Taper Tantrum that year. Meanwhile, the pace of positive flows into equities slowed dramatically to $165 billion in 2014 compared to $358 billion the previous year.

But it wasn’t all good news for credit funds, with a pick-up in market volatility and growing divergence between investment-grade corporates and high-yield funds in the second half of the year as the Federal Reserve ended its asset purchase program. Investment-grade funds saw inflows of $168 billon, while high-yield funds experienced outflows of $23 billion.

“Excess and total returns were positive across the credit markets [in the first half of the year], and inflows remained robust,” wrote Barclays credit strategists in their 2015 outlook published earlier this month. “The market shifted into a higher volatility regime in the second half of the year,” they added, citing retail outflows from U.S. high-yield in July as one of the causes.

By region, the U.S. was the clear winner in 2014 with inflows of $76 billion into equity funds compared to outflows of $15 billion and $43 billion from emerging-market and European equity funds, respectively.

Finally, the inexorable rise of exchange-traded funds at the expense of mutual funds became readily apparent. ETFs enjoyed inflows of $163 billion – or 8% of AUM – while mutual funds saw a paltry $2bn of positive flows.