View the article online at http://citywire.co.uk/money/article/a894913
Did 'Brexit' fears blind investors to February's rally?
Money continued to pour out of funds last month, new figures show. We look at where investors were selling and buying.
- Nearly £400 million flowed out of investment funds in February;
- Nervous investors like 'Absolute Return' and 'UK Equity Income funds;
- Star fund manager Neil Woodford remains popular;
- Dividends power stock market returns, analysis shows.
Nervous investors continued to pull money out of stock market funds last month and those that did invest focused on tried-and-tested and defensive assets, new figures show.
New Year haemorrgage
According to the Investment Association, retail investors pulled a total of £399 million from authorised unit trusts and open-ended investment companies in February, once withdrawals are netted off against fresh investments.
That’s an improvement on January when net outflows from retail funds hit a seven-year high of £463 million as investors ran for cover as stock markets plunged around the world.
Nevertheless, it’s a terrible start to the year for fund managers and in contrast to the previous February when they took in £1 billion as investors responded to more positive market conditions and sought to use their annual ISA allowances before the tax-year end on 5 April.
Retail investment managers could take some comfort from the fact that the overall amount of money in their funds rose to £855 billion from £843 billion in January as stock markets recovered after the New Year sell-off. However, this was down from £874 billion a year ago, the fund manager trade body said.
M&G and mystery exodus
Laith Khalaf, senior analyst at Hargreaves Lansdown, the funds supermarket, expressed surprise at the continued investor exodus given the mid-month rally in stock prices that saw the FTSE 100 regain its New Year starting point. He believed uncertainty from the forthcoming EU referendum was discouraging overseas investors.
‘One possible reason behind the poor numbers is repatriation of funds by international investors ahead of the “Brexit” vote, which could explain the exceptional levels of outflows seen in the last two months,’ said Khalaf.
He noted that Prudential had earlier revealed that its M&G investment arm had seen £11 billion withdrawn from its funds.
Analysis by Numis Securities of figures from investment data provider Morningstar reveal that the giant M&G Optimal Income , a bond fund run by Richard Woolnough (pictured above), was again the most heavily sold fund, which lends credibility to reports that the Pru was seeking to cap his hefty pay package.
Over £770 million was withdrawn from the fund in February, which still leaves it with an impressive £16.2 billion, as investors worried about the prospects for sterling and difficult trading conditions in bond markets.
Unsurprisingly, this year’s ISA investors appear to favour funds that seek to minimise losses, a status that bond funds used to hold before a wave of central bank interventions made many fixed income stocks too expensive.
‘Targeted Absolute Return’ funds, which can invest in a wide range of assets in order to generate positive three-year returns, regardless of market conditions, were the best-selling sector last month, repeating a feat they achieved last October.
Net retail sales into this category rose to £243 million from £226 million in January with Invesco Perpetual’s Global Targeted Returns the most popular fund last month. It attracted £453 million to lift its assets to £4.7 billion, according to Numis analysis of Morningstar data. This knocked its arch rival, the £26.7 billion Standard Life Global Absolute Returns (GARS) fund, into third place with net inflows of £314 million, having been the best seller in January.
In the year to end of February the Invesco Perpetual fund has done better, shedding just 0.4% compared to a 4.1% decline in Standard Life GARS.
Adrian Lowcock, head of investing at AXA Wealth, said: ‘The popularity of targeted absolute return funds in February does highlight that many investors had taken on more risk than they possibly liked. The effects of the financial crisis continue to linger as investors become risk averse very quickly.’
Keep your guard
With markets continuing to react negatively to US interest rate rises, China’s slowdown and the looming EU referendum, Lowcock said it was sensible for investors to have some protection in their portfolios.
He reminded cautious investors not to drop their guard. ‘However, it is also important to remember to maintain the level of protection in a portfolio in the good times, when confidence returns and markets are rising, as the next big sell-off will likely come out of the blue,’ he said.
The defensive mood was underlined by Investment Association figures showing Money Market, or cash, funds receiving net sales of £48 million, while a modest £25 million flowing into Mixed Asset funds which invest in bonds alongside shares, in order to dampen stock market volatility.
By contrast, £196 million flowed out of funds investing in equities, or shares, while Property funds suffered net redemptions of £119 million, their biggest monthly outflow since November 2008, at the height of the financial crisis.
UK Equity Income funds bucked the trend, however, garnering net retail sales of £214 million, up from £142 million in January, while Japan replaced Europe as the most popular region for equity investors, attracting a net £78 million.
Woodford beats Barnett
Their figures suggest that investors continue to follow Woodford from the equity income funds he used to run at Invesco Perpetual. The Invesco Perpetual High Income fund, now run by Mark Barnett, shed £72 million last month as more investors sold than bought into the £12.4 billion fund.
UK Equity Income funds invest in companies they think will grow their dividends over the long term. The discipline of paying regular income to shareholders is generally regarded as good for businesses and certainly the dividends boost the returns for investors in funds.
Figures on this website show UK Equity Income funds have delivered an average total return of 46% over five years, beating the 34% from rival UK All Companies funds that don’t emphasise dividend payers as much.
Analysis by investment platform AJ Bell reveals that the 26 FTSE 100 companies that increased dividends in each of the past ten years have seen their share prices gain an average of 265% since 2006 compared to just 9.2% growth in the index.
Mark Dunne, AJ Bell’s head of research, said: ‘If a firm is able to grow its distribution for 10 consecutive years the share price must surely respond, providing capital gains to supplement the valuable income.’
However, with dividends under pressure as company profits slow in response to the weaker economy, Dunne cautioned that companies, like Pearson (PSON),could see their share prices tumble when they ended a long period of rising payouts.
Trackers win £1 in £8
Also bucking the flight from equities were passive, or index-tracker funds, which attracted £91 million last month. Although sharply down from £500 million in January, that still represented £1 in every £8 invested in February, according to Hargreaves Lansdown.
‘We expect this trend to continue as investors desert the middle ground inhabited by “closet trackers” and plump for low-cost passive funds on the one hand, or high calibre active funds on the other,’ said Khalaf.
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