At the start of 2024, many asset allocators were predicting good fortunes for those who invested in fixed income assets. Propelled by a combination of rising bond yields and interest rate increases over the previous year, many stated last year would be ‘the year of bonds’.
Judging by the recent release of the Investment Association’s (IA) fund sales statistics for the full calendar year, it seems retail investors took note. According to the IA, the Corporate Bond sector – which amalgamates the IA USD, EUR and Global Corporate Bond peer groups, was the top seller in 2024, attracting some £4.14bn of net retail inflows over the 12 months.
To put this into context, over the same 12 months the IA UK All Companies sector – which took the unwanted honour of being the least popular IA peer group for the third year in a row – saw net outflows of £9.06bn.
At the same time, sales of global corporate bond funds bested the £3.65bn that went into the IA Global equity sector and the £2.64bn that went into the ever-popular IA North America sector.
Eduardo Sánchez, associate research director – fixed income, alternatives and multi-asset – at Square Mile Research, highlighted two reasons for the significant flow of assets into global corporate bond funds in 2024.
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Firstly, he noted investors are attracted by the higher yields on offer. “Following the continuous rise in government bond yields since 2021, and as central banks started cutting rates in 2024, the compensation offered by corporate bonds is quite attractive relative to money market funds as base rate yields are starting to come down,” said Sánchez.
“Another reason among UK investors is the appetite to diversify from their local market into international bond markets,” he added. “This trend started years ago within equities and we are seeing it more recently within fixed income by both institutional and retail investors, particularly since the minibudget crisis at the end of 2022.”
Looking into this year, Sánchez noted that corporate bond managers have, in general, a moderately cautious outlook for 2025.
“They are confident with the balance sheet strength across corporates, and when fundamentals are compared to valuations as well as technical considerations the overall economic backdrop looks positive,” he said. “This view is softened by the tight levels of credit spreads. Corporate bond managers are also anticipating spikes of volatility in the markets, around the new tariffs and immigration policies from Donald Trump.
“With the current high levels of income across the board, managers feel positive with the diversification benefits fixed income can provide, should we experience a market sell-off.”
In terms of performance, Michael Walsh, multi-asset solutions strategist at T. Rowe Price, noted that corporate bonds globally tended to deliver mid-single-digit positive returns over 2024.
“Riskier, shorter-maturity bonds fared best, as risk assets had another good year,” said Walsh. “Tightening spreads, low defaults and attractive carry more than compensated for moderate increases in the underlying yields on many benchmark government bonds across the world.”
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After a positive view of high yield and emerging market debt, in particular for much of the last 12 months, Walsh sees spreads looking narrow relative to history at these levels.
“The extra yield on the Bloomberg Global Aggregate Credit index has only been this low for a handful of months in the almost two decades since the global financial crisis,” he said. “In one light, this makes sense – economic fundamentals remain attractive, with still modest default expectations for company debt. But against a volatile economic, trade and political outlook, that leaves little room for error.
“Stubborn inflation could prove a headwind for fixed interest of all types, as it did in 2022,” he added. “Within the fixed income components of multi-asset portfolios, we favour emerging market local currency debt, where we still see an attractive balance of risk and return – despite uncertainty around trade policy and the path of the US dollar. We also prefer inflation-linked government debt and cash as ballast for portfolios.”
Looking beyond just corporate bonds Gregory Peters, co-CIO at PGIM Fixed Income, is maintaining a positive for fixed income, and said he thinks current conditions offer a “compelling entry point for investors”, especially those on the sidelines or overallocated to equities after the stock market’s recent run.
“Interest rates have passed their peaks, potentially adding momentum to the existing bull market,” said Peters. “Quarterly fluctuations notwithstanding, odds favour stable-to-lower yields ahead, which bodes well for fixed income returns whether they come from carry or total return.”
He added: “From secular stagnation to generational highs in inflation, paradigm shifts and entire market cycles are playing out in market swings normally observed across a matter of quarters. Navigating an ever-changing market underscores the importance of agility and anticipation, particularly when signs of another paradigm shift emerge.”
With dispersions high across many sectors and regions, Peters said credit selection remains critical to outperformance. “Although credit spreads are tight and vulnerable to short-term setbacks, fundamentals remain firm, as does net demand for fixed income as growth moderates. Default expectations generally remain below historical averages.
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“This combination of factors suggests that spreads may remain in a historically tight range for some time to come.”
In terms of specific global corporate bond funds, Sánchez at Square Mile highlighted two funds for investors to consider. This first is the MAN Global Investment Grade Opportunities fund.
“Lead portfolio manager Jonathan Golan has delivered an impressive track record managing corporate bond strategies,” he said. “We like his thematic, high conviction approach, driven by bottom-up credit selection. Given the focus on smaller companies and the lower credit quality part of the market, this fund is better suited to income-oriented investors and those with a higher tolerance for credit risk.”
Secondly is the TwentyFour Corporate Bond fund, managed by Chris Bowie and Gordon Shannon. “This fund benefits from the expertise of a pair of very capable managers,” he said. “TwentyFour Asset Management is a boutique asset manager, that is dedicated solely to running fixed income strategies.
“The managers, of which we hold a high regard, are supported by an ample, and well-regarded team, as well as an excellent in-house fundamental research system, ‘Observatory’. Just passing its 10th year anniversary, the fund continues to deliver attractive risk-return characteristics thanks to its focus on capital preservation and mitigating volatility.”
