The first half of 2012 tested the mettle of even the hardiest investor. The FTSE 100 offered some warmth in the winter months at the start of the year, only to turn cold again on entering the spring. During the early summer months, equity-market returns remained as elusive as the sunny weather and by the end of June investor spirits were thoroughly dampened by a flat six-month performance.
Against this backdrop and in combination with ongoing eurozone instability, signs of softening in China and economic weakness in the US, money fled equity markets—in particular those of the developed world—in search of safer havens or more creative ways of generating returns. Morningstar’s UK fund flows data show a net total of £4.4 billion flowed into UK-domiciled funds in the first half of 2012, £3.3 billion of which went to long-term funds, but the broad category data reveal investors pulled money from equity funds while ploughing cash into Allocation, Alternative and Money Market (short-term) funds in an attempt to preserve capital. A net £1.8 billion was withdrawn from equity funds over the first six months of the year.
Digging deeper into the data, UK fund flows show only four Morningstar categories succeeded in attracting investor money in the first half—GBP Flexible Allocation (£2.3 billion), GBP Alternatives – Multistrategy (£2.1 billion), GBP Corporate Bond (£1.6 billion) and GBP Money Market – Short Term (£1.2 billion). Allocation funds continue to benefit from uncertainty and investor focus on capital preservation over return maximisation, as also reflected in Morningstar’s European fund flows report. Meanwhile, the strength of multistrategy funds highlights the lack of conviction in any one asset and the attraction of funds promising ‘absolute returns’ in a low interest rate environment. Money flowing into the GBP Corporate Bond category again signals the need to climb up the risk ladder in search of yield.
On the flipside of the coin, GBP Government Bond funds suffered the worst outflows relative to other Morningstar categories over the first half as investors pulled £2.7 billion from the former ‘safe haven’ in continued response to negative real returns, while withdrawing another £1.1 billion from the Europe ex-UK Large-Cap Equity category in an to shelter capital from eurozone woes.
So who benefited from these trends? The fund that stands out as having attracted the lion’s share of investor money since January is Standard Life Global Absolute Return Strategy, which saw net inflows of £886 million, followed in second place by Newton Real Return fund, into which £421 million flowed. Both funds are rated Bronze by Morningstar OBSR analysts. M&G Strategic Corporate Bond, M&G Corporate Bond and M&G Recovery attracted £617 million in aggregate, which helps to explain the net total of £2.4 billion that flowed into M&G funds over the six months. These two corporate bond funds from M&G are rated Silver by Morningstar OBSR, while M&G Recovery has earned our highest qualitative rating of Gold. No other fund provider experienced such outstanding inflows during the period. Amongst the casualties in the first half was the Standard Life brand, which suffered net outflows of £1.8 billion as investors pulled money from the provider’s UK Gilt fund in the first quarter.
The reversal of market trends in March of this year has had investors scrambling to adjust allocations, yet Morningstar research has repeatedly concluded that investors have an unfortunate tendency to make good investment decisions at inopportune times. With no respite in the volatility in sight, the constant flux of investor money underlines the need to build an ‘all-weather’ portfolio and have confidence in one’s conviction. That said, by the end of June it had become clear that the overriding trend so far this year has been one of a lack of conviction and a subsequent desire to get more creative in the hunt for real returns. While the prevailing environment of fear continues to spur investors to shun equity in favour of bonds, and to avoid more traditional assets and fund strategies in favour of getting creative, this phenomenon could also present an interesting opportunity for investors wishing to go against the flow. Beyond fixed income, several portfolio managers recently interviewed by Morningstar have highlighted the relative value of European equities for those whose mettle isn’t malleable.
