There is a consensus of opinion that, by and large, bond managers and their funds have withstood the challenges of the post-Covid investing era. The market volatility of March 2020 - in which many portfolio managers either simply held their nerve or embraced more flexible strategies without recourse to excessive leverage, has been followed by a period of relative calm - albeit amidst a renewed tightening of spreads in 2021.

Total returns from investment grade government and corporate bonds remain negative this year: According to Trustnet research, only around 15 per cent of fixed income funds managed a positive return in 2021’s first two months. Longer term considerations are casting a negative pall, as increases in government bond supply as a result of public spending prompted by the virus ($4trn in additional infrastructure and stimulus-related spending in the case of the US), inevitably lead to falling bond prices, higher yields - and inflation.

But recent data from the US shows that net inflows into bond funds are growing at a faster rate than those for comparable equity instruments this year, with bond mutual funds and ETF's adding $372bn as of June 23 - compared with less than half of that in the equities category. Should these trends continue, this should easily beat the $446bn of inflows recorded last year (source FT/Investment Company Institute).

The continued popularity of bond funds in the face of new economic trends is driven by a combination of fears of a long-awaited equity markets sell-off, together with the increasing need for fixed returns for the developed world's ageing populations. Commentators pointing out that, over time, the % increase in bond fund inflows mirrors the proportion of retirees switching into fixed returns rather neatly. This is something which has been supported by larger schemes switching to de-risking strategies in the case of the Defined Benefits world.

In the absence of new capital into the equities market, it seems that investors are looking for a flexible, responsive approach in the face of post-Covid market headwinds - and one category which appears to be benefiting is that of Strategic Bond Funds. This is a difficult part of the market to categorise, since the range of funds which fall under its definition is broad, but those which have the flexibility to invest across the entire debt market ie the ‘true Strategic Bond Funds’ seem to currently offer a popular solution. One leading SBF has seen inflows since the beginning of 2020 which have taken it from £719m under management, to £3.2bn.  Citywire’s Robin Amos takes up the story on the bond funds which appear to be passing the Covid-test…