"Not paid for the risk": UK wealth managers pull more than £2bn from investment-grade credit. Who is cutting their allocation, and where is the money going?

Three of the UK's most closely watched fund buyers have reduced their allocation to investment-grade credit and investment-grade credit funds because they believe the extra yield over government bonds no longer pays for the risk.

On 1 October, AJ Bell published the results of its Q3 Favourite Funds review. It added the flexible Schroder Strategic Bond Fund and removed Waverton Sterling Bond. Paul Angell, Head of Investment Research, wrote that AJ Bell's conviction "has weakened following the retirement of long-standing lead manager Jeff Keen", and that the fund's "primary focus on higher quality bonds (minimum 80% investment grade) hinders its return potential in comparison to the more flexible approach of the Schroder Strategic Bond fund."

On 5 October St. James's Place announced that it had cut investment-grade corporate bond allocations by more than £2bn across its Polaris, Polaris Multi-Index and InRetirement ranges. SJP cited "narrower valuation opportunities relative to government bonds" and greater overlap with the technology companies already prominent in equity markets after heavy issuance. The money has gone into conventional and inflation-linked government bonds, UK equities and small caps. Robin Ellis, Director of Multi-Asset Portfolio Management, said: "As concentration has increased across both equity and bond markets, we've broadened our sources of return to help portfolios remain resilient, adaptable and positioned for long-term growth."

Saltus's asset allocation committee said in its September update, published on 1 October, that it is also trimming investment grade, as the extra yield over governments is "close to its lowest since the financial crisis" adding: "We don't believe we are being paid enough to take the additional corporate risk." Saltus is also reducing UK gilts and building a global government bond holding hedged to sterling in their place.

The same view appears in LGPS advice. In its strategy review for Hammersmith & Fulham Pension Fund, according to committee papers published on 8 September, Isio recommended cutting the buy-and-maintain credit allocation from 15% to 10% and adding a new 5% index-linked gilt allocation, citing that "Credit spreads are currently tight relative to historical averages."