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March 17, 2016

Fixed income funds enjoying a renaissance

Fixed income funds enjoying a renaissance

Fixed income products have long been considered the poor cousin of equity, property and even multi-sector products.  They offer lower margins, limited potential for high returns and the market has a generally low level of understanding of how fixed income works.

However, fixed income funds are enjoying a renaissance of sorts.

Today’s first chart shows how diverse the fixed income segment is – and how well-spread the flows are.  Diversified fixed income funds – the industry’s one-stop-shop solution for fixed interest, took $1.7b over the year, and the ‘building blocks’ that make up a DFI strategy, Aussie and global fixed interest funds, took a further $1.9b.  Absolute return fixed income funds, which make up around 5% of the FUM, experienced enormous netflows of $1b.

Almost every subsector of fixed income funds is in net inflow right now.  There is such a wall of cash flowing into fixed income funds that the rising tide is lifting all boats (if not equally).

So, while many advisers tend not to talk about fixed income as much as equities, the data shows fixed income is continuing to receive healthy net inflows, and more than any other single asset class.

The second really interesting thing that is happening with fixed income funds relates to asset manager margins.  It’s the only asset class in the market where there are strong net flows into more expensive products.

Across most asset classes there has been a steady transition to lower-cost products in recent years as advisers help clients manage costs.  Not so in fixed income.  As today’s second chart  shows, despite fixed income funds traditionally carrying a price tag somewhere around the 50bp mark, there are very healthy flows to more expensive products at 60-80bp and even >80bp.

The more expensive products are typically well-differentiated, have a clear value proposition and respond to a specific customer need, reducing the importance of price on investment selection or even inducing advisers and their clients to pay a premium.

For Fixed Income teams, who may have felt undervalued compared to their equity counterparts for some time, perhaps the tables have turned as the rest of the market finally appreciates the value they can bring to client portfolios.

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