Simon Read: As cash pours in, worries about safe haven grow

Click to follow
The Independent Online

There's been an investor flight to safety in the past year with corporate bond funds in particular seen as a steady home for institutional and retail investors uncomfortable with some of the wild fluctuations we've experienced in equity markets.

Fixed-income funds have dominated the Investment Management Association's sales figures in each of the past four quarters, staggeringly accounting for almost all the net inflows into unit trusts and Oeics in the fourth quarter of 2011.

This year the fixed-income sector has attracted more than half the cash that has poured into UK funds. Yet even while the cash pile grows, so do the warnings of a potential bond bubble in the offing.

There's also the overhanging risk of interest rates rising, which could quickly lead to bonds losing their attractiveness and value.

Doomsayers are very quick to see bubbles and armageddon but their views shouldn't be dismissed as ravings. Illiquidity can lead to lock-ins, for instance. That can prove a problem and is not just idle scaremongering.

The situation actually happened with property funds a few years ago when a sudden sales rush led to fund companies introducing lock-ins, leaving investors whistling for their cash in the short term.

Whether or not that situation is likely to arise with corporate bonds, investors should not panic and pull their holdings from the sector. A more reasoned approach is needed, rather than short-term fear. The question to ask is: do they still represent good value, and will they in the coming months?

Whatever your view of that, tweaking a bond-heavy portfolio to make it a little more balanced could prove a wise move.