Wary investors rush to take billions out of bonds

Retail investors withdrew a net £2.35 billion out of bond funds in February gilts after being spooked by the surge in inflation.

The retreat from funds invested in fixed-interest securities such as government and corporate bonds was one of the largest on record, as markets braced for higher inflation and interest rates.

Retail investors have about £308 billion invested in bond funds, which have become enormously popular over the past two decades, with low inflation and falling interest rates bolstering returns.

Latest data from the Investment Association showed a huge increase in investors pulling back from bond investment, up from £344 million of net outflows in January.

Last year the category experienced strong net inflows, but the sudden rise in inflation and Bank of England moves to push up rates have rattled investors. Growing tension between Ukraine and Russia and the invasion on February 24 also unnerved investors, who in total pulled a net £2.5 billion from funds of all sorts in the month.

That made it the third worst month for the asset management industry since records began in 2002. The worst was March 2020, when the pandemic led to a record net outflow of almost £10 billion.

UK shares took a battering, too, with the UK All Companies category being the worst, with net outflows of £503 million in the month. Investors took refuge in North American funds, with net inflows totalling £570 million.

The shift to cheap, passively managed funds continued. Investors bought a net £1.3 billion of tracker funds, boosting assets in the class to £289 billion. Passive as a share of total funds under management is now 19.3 per cent. Funds labelled as “responsible investment” did well, notching up net inflows of £670 million.

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