Recent history has show that retail investors are often left paying the price when things go wrong, ...
Recent history has show that retail investors are often left paying the price when things go wrong, and questions are beginning to emerge about whether the bond market could be the next bubble to burst.
The IMA's corporate bonds sector has leapt up the rankings according to recent ISA season sales figures as investors continue to follow the lead set by life companies by reducing their exposure to equities.
Historically speaking, bond prices are currently expensive compared to equity prices, while at the same time there are few high quality bond issues available, says Charles Ansdell, head of corporate communications at Inter-Alliance.
"In addition, when the 10% tax credit on equity income in ISAs is abolished, the 20% credit on corporate bonds is being retained, which means a widening tax advantage in holding bonds."
"The danger is that everyone piles into the asset class without realising that returns rely on factors such as ratings agencies, which have done strange things since they were caught out by Enron."
Another problem for retail investors is that messages are very definitely mixed at present.
L&G, for example, earlier this year argued that with equity yields outperforming bond yields it made sense to switch to equities.
In contrast, the example of Boots the Chemist's pension fund shows how well bonds can perform when used for a certain purpose.
And the FSA's new mantra of reducing reliance on past performance figures does not exactly make the choice any easier.
Just because equities have historically outperformed fixed income does not mean that shares will continue to outperform government or corporate debt, a view supported by Joseph McDevitt, head of Pimco Europe, which runs fixed income on behalf of Allianz Dresdner Asset Management.
"We've had three great years, but it's important to bear in mind that it hasn't been of the extent of the tech bubble. And bonds over time are doing well."
Pimco claims to run the biggest US corporate bond fund, the Pimco Total Return Fund valued at $68bn as of December last year.
A key question facing UK bond fund investors in the shorter term will be inflation, McDevitt says, particularly if inflation rates continue to remain above the Bank of England's 2.5% target rate for many months more.
Higher inflation cuts yields on fixed income products and makes equities look a better bet as companies can reduce debt and increase headline earnings by raising prices.
If UK inflation does not return to trend, the penny may drop and people will begin to query the bank's grip on monetary policy.
While the UK government has not had direct input into monetary policy since the Bank of England was granted independence to set interest rates in 1997, the US government has signalled its intent to reflate the US economy by using fiscal policy to drive through massive tax cuts.
Jason Hollands, director and head of communications at ISIS Asset Management says bonds will retain their popularity and that the bond market will not crash.
"Fashions come and go, but bonds are a core asset class along with cash, equities and property. Unlike niche tech funds, bonds are not going to go away. In many ways the 1990s bull market was an historical aberration, so bond funds may become a more natural choice for ISAs, for example."
Also because of their core status, bond funds are also more likely to survive a pending consolidation in the fund management industry.
ISIS Asset Management yesterday quoted figures from a new Mercer Oliver Wyman report into the financial health of the UK fund industry, which suggests up to 57% of all retail funds are struggling to make a profit and up to 25% of all UK retail funds could be culled if the bear market continues.
ISIS has already announced plans to reduce the number of funds it offers to 30 from 55 currently, although the company will not provide further details for some weeks.
However, Hollands adds that the general feeling about the consolidation flagged up by the Mercer Oliver Wyman report is that it is likely to hit small equity funds the hardest.
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