Why are investors rushing into bonds?

TOP- PERFORMING STRATEGIC BOND FUNDS

were betting against the Bank of England actually raising rates, he said. The Bank has talked for a long time about increasing rates but little action has been seen. A lack of movement by the Bank would have meant a rise in the bond prices and investors may have been buying in order to benefit.

Investors’ fears over the stock market may also account for the move into bonds. Share prices have risen dramatically over the past year and savers may have wanted anted to increase their bond exposure e to ensure their investments were diversified.

“If you have bearish rish views on the UK economy and stock tock market, you might go into bonds s instead,” Mr Khalaf said. Mr Hollands lands agreed. He said: “I suspect this is primarily a sign of growing scepticism sm towards how long the bull run in stock markets ts can continue and investors holding to o the traditional perception ion of bonds as a relatively vely defensive asset.” A large chunk of the e money that went into nto bonds went into “strategic” bond funds. The managers of these funds have the flexibility to invest in all types of bonds, while some also use complicated “derivatives” to make certain bets.

Mr Khalaf said: “Generally speaking that is a good thing if you have a good manager at the helm, but it is still no guarantee that they will get out of the way in a rush for the exits in the bond market as a whole.”

The TwentyFour Dynamic Bond fund is one strategic bond fund that appears on The Telegraph 25 list of our favourite funds.

Gary Kirk, who runs the fund, said he had seen lots of new investor money, despite it being a tricky period for bond managers. increase that much to have an impact on the bond markets.”

Fraser Lundie, a strategic bond fund manager at Hermes Investment Management, said he didn’t have a good answer for why investors flooded to bonds over the summer. However, he said there were big trends that were pushing more people to bond investing generally, such as an ageing population.

Within the bond funds he runs he uses derivatives to bet against certain areas of the bond market, so he profits when they fall in price. He does not own any government bonds in his Multi-Strategy Credit and Absolute Return Credit funds.

He prefers bonds from emerging markets, in particular basic industry and energy companies. He highlighted Vale, the Brazilian mining firm, which cut its dividend recently to bolster its balance sheet – not good news for shareholders, but attractive for bond investors.

However, even strategic bond fund managers, with all the weapons in their arsenal, are struggling to find yield. Mr Kirk Ki said that while in 2011-12 the fund yielded about 7pc, the figure was now n closer to 4.5pc. “The trick is capital cap preservation as much as anything anythin else, this is not the right environment environme to be stretching out yield,” he said. sa

But strategic bond b funds aren’t without their ris risks, said Mr Hollands. “The risk is that if monetary policy tightens more rapidly than the markets expect – and central banks themselves th are signalling s – that could c prompt quite a bit of volatility from investments that many investors may m expect to be defensive,” he said.

There has been a flood of money into bond funds, leaving experts flummoxed. Laura Suter ‘Many bond fund managers have never experienced rising interest rates’

Bonds in mining companies have become attractive to some investors; below, Bank of England Governor Mark Carney