One of Britain's leading bond fund managers is urging investors to "get ready" to ditch bonds because they are riskier than equities at this juncture.
The warning will sound alarm bells for tens of thousands of risk-averse savers who have piled into bond funds since January amid the economic turmoil. They have poured almost £4bn into corporate bond funds, which have outsold any other type of fund in four of the past five months. At the same time, UK equity funds have been the worst sellers.
Talking to The Daily Telegraph this week Chris Bowie, manager of the £257m Ignis Corporate Bond fund, said: "Bonds should definitely not be a buy for investors right now – I would say get ready to sell."
Mr Bowie admitted that his colleagues in the marketing and sales department would be far from happy with his remarks, but he wanted "to be honest".
He added: "For me the question mark is over inflation. Will central banks around the world print money to get out of this debt hole? If they do, that will mean inflation, which is very bad news for bond holders."
Mr Bowie is not trying to explain away poor performance – he has returned more than 50pc to holders of his fund in the past three years, ranking fifth in a sector of 74 funds.
He said that, in normal market conditions, bonds were safer than equities. But right now yields are at record lows (so prices are high). Mr Bowie expected yields to rise in the medium term, which would see bond prices fall, creating the risk of capital losses for existing investors.
Tim Cockerill of Rowan Dartington, the stockbroker, agreed. "It's rare to get a manager saying sell their own asset class, but there's been a view for a long time that bonds are overpriced." Mr Cockerill made a distinction between types of bond, however, saying that a "sell" stance was focused on high-quality government bonds, such as gilts and German bunds, and top-end investment-grade corporate bonds.
"Yields are the lowest they have ever been. With bunds paying around 1pc, for example, investors are seeking safety and are not worried about the return, which after inflation is negative," he said.
"The danger is that when interest rates rise or risk appetites change to favour 'risk', then bond prices will fall, and potentially sharply. It's happened before with gilts in the Nineties, when some lost 15pc-20pc."
Mr Cockerill said that although it was difficult to time, the bond funds to sell would be those with high levels of exposure to gilts and other investment-grade sovereign debt and corporate bonds.
Henderson's head of fixed income, John Pattullo, said he had "huge sympathy" with the negative view of bonds, but he would not recommend investors to bail out now. "Mathematically and historically, it is true that bond holders should get ready to sell," he said.
But Mr Patullo said he understood why nervous investors might be attracted to bonds and why their rationale remained intact. "Our problem is that this is not a normal economic cycle – we don't think the catalysts currently exist to cause interest rates to rise.
People want to hoard cash in bonds not for income – they are unconcerned with negative returns. They just want capital preservation. From a valuation perspective I agree that bonds are a sell – but from a capital preservation perspective I do not agree." He said he was mindful of the risks, however, and as a result Henderson had moved its fixed-income funds towards more defensive types of bond.
"We need equity market stability, economic growth and interest rate rises for bonds to be a sell – I just don't see these things happening any time soon," he added.
Multi-manager Gary Potter of Thames River sat between the views – he said there was very little value left in the sovereign debt of Western economies, but in corporate and high-yield debt there was better value available.
"With inflation running at 3pc there is a negative real yield with government debt, there is no growth potential in this yield and no inflation protection in this yield and there is an implied capital loss to redemption, with gilts in many cases trading significantly above par redemption value. A person landing from Mars tomorrow would not think this an attractive investment," he said.
"The better value lies in the top end of the high-yield market and bottom end of the corporate debt area. You are at least getting a better yield for being there and corporates generally are in rude health. Corporate and high yield obviously carry more risk, but in our view, for the long-term investor, equities look better value, although you must be able to accept the volatility that comes with it."
Mr Potter favoured Kames Capital Global High Yield fund, Henderson Strategic Bond and the Pimco Global Diversified Income fund.
Simon Callow, manager of the CF Midas Balanced Growth fund, agreed – he ranked sovereign bonds as the least attractive asset class and as a result has no exposure at all to gilts.
"We see an increasingly compelling case for selective European equities. In particular, we are attracted to equities listed in European countries that have their own currencies and healthy national finances. Norway, Sweden and Denmark fall into this category," he said.
"We also like high-yield corporate bonds. Multinational companies are in a much better place this time around compared with 2008, with stronger balance sheets and debt maturities having been successfully managed."
Mr Callow favoured the 24 Asset Management Dynamic Bond fund and Royal London's Extra High Yield Bond fund.
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