Investors pulled a significant amount of money out of active bond funds and instead bought into passive equivalents during June 2021, according to the latest Everything Flows report from Refinitiv, which found that passive bonds netted £1.4bn while their active counterparts suffered £678m of outflows.
Actively managed equity and commodity funds suffered a similar fate during the month, albeit to a lesser extent, while actively managed real estate funds also saw net outflows. In contrast, investors turned their attention towards active money market, alternatives and mixed asset funds - the latter of which saw the largest inflows during June at more than £1.5bn.
Dewi John, head of research at Refinitiv, told Investment Week the move from active to passive funds is more commonly seen across equity funds as opposed to their fixed income counterparts, but believes cost was "likely the main driver" for moves seen in June.
"The average total expense ratio for passive bond vehicles is 0.2%, and for active funds, 0.9%. That is significant, not least in a world where yields have been squeezed," he explained.
The head of research added that ETFs and passive mutual funds "divided up the fixed-income cake" between them last month, with respective inflows of £591m and £754m.
"Prior to the market meltdown in Q1 2020, there was considerable concern that the mismatch between bond ETFs' liquidity and the illiquidity of many of their underlying bonds could exacerbate any crisis, but the fact that these vehicles made it through unscathed has boosted investors' confidence in them," John continued.
"Advocates of active may have a point when they argue that passive investors are exposing themselves to the most debt-laden issuers. But those chickens will only come home to roost when the default cycle heats up."
In terms of individual vehicles, the report found that two of the top five money takers overall in June - Lyxor Core US TIPS (DR) UCITS ETF Monthly Hedged and Vanguard Global Bond Index GBP Hedged - were fixed-income ETFs. Other passive bond funds to have seen the greatest inflows throughout the month include Vanguard UK Investment Grade Bond Index, Legal & General Short Dated GBP Corporate Bond Index, and iShares $ TIPS UCITS ETF GBP Hedged.
"June's big money takers are high-rated corporates and US and UK linkers - the latter which cannot default," John reasoned.
"Three out of the top five passive bond fund money takers (and seven out of the top ten) are plays on inflation - either short-dated or US Tips - showing that UK fixed-income investors are factoring in this risk."