Investors Sell Cautious Funds for European Equities

Morningstar data suggests investors are becoming more confident to invest invest aggressively; selling £932 million of Cautious Allocation funds for European equity funds

Karen Kwok 4 March, 2016 | 9:16AM
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Investors have been buying more aggressively positioned funds, indicating a more positive view on the European outlook, according to the latest data from Morningstar Direct.

Investors Flock to Europe Large Cap Equity Funds

Morningstar fund flows data revealed Europe large-cap equity funds saw the most inflows of all the Morningstar Categories in January of £485 million. It was the largest inflow growth in six months.

Threadneedle European Select was the largest contributor to the sector with an inflow of £84 million. Although the fund has lost 1.5% over the past year, it has exceeded the performance of the index by 3.9%. The fund is Bronze Rated by Morningstar analyst.

The most popular fund of January across all sectors was the Standard Life Global Absolute Return Strategy Fund, which had an inflow of £304 million. The fund helped to push inflows into the Multistrategy sector to £322 million in January alone. It is a Bronze Rated fund by Morningstar analyst.

Investors Shy Away From Cautious Allocation Funds

Cautious Allocation funds saw an outflow of £932 million in January, making it the least popular fund sector in the UK funds market. Investors have shied away from Cautious Allocation funds since April last year – recording total outflows of £9.3 billion over the past 10 months.

What Is Cautious Allocation?

Funds within the Cautious Allocation sector are required to have a minimum 45% of investment in fixed income or cash, and up to 35% of investment in equities. The aim of the sector was to force diversification of assets and ensure that part of the portfolio was held in lower risk assets, according to Investment Association, the industry body.

In January 2012, the Cautious Allocation sector was renamed as ‘Mixed Investment 20-60% Shares’ by the Investment Association, in response to concerns about the use of risk adjectives within the old titles. Massive outflows of this sector might signify that investors are not satisfied with their investments in lower risk assets.

The UK Corporate Bonds sector came second on the least popular fund list, recording outflows of £310 million in January.

How Does the Sector Perform?

Some of the biggest contributors to the outflows in the Cautious Allocation sector were M&G Optimal Income Fund, IP Monthly Income Plus and AXA Framlington Managed Income. Over the last year, these funds have not performed as well their comparable index, although only at a single-digit percentage. This may have fuelled investors’ decision to sell out of the funds.

M&G Optimal Income Fund has lost 4.3% in the past year, and has underperformed the index by 5.5%. The fund was the least popular fund among investors last month – and in the preceding months – and saw a further £611 million in outflows last month. It is a Silver Rated fund by Morningstar analysts.

IP Monthly Income Plus has lost 4.6% in the past year, and has underperformed the index by 5.7%. The fund recorded £27 million in outflows in January. It is a Silver Rated fund by Morningstar analysts.

AXA Framlington Managed Income has lost 4.1% in the past year, and has underperformed the index by 5.3%. The fund saw an outflow of £7 million in January.

Investors Look to Higher Risk Assets

The dumping of perceived lower-risk funds to move towards more aggressive strategies is in line with comments from Vanguard on investor sentiment this week.

“In an era of low yields, many retirees and other income sensitive investors have sought ways to maintain their income while preserving the value of their capital,” Todd Schlanger, investment strategist of Vanguard said.

As a result, investors have pursued “higher-yielding investments” to increase their portfolio’s income in a short term.  Examples include emerging market or strategic bond funds, property investments and equity-income strategies, Schlanger adds.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
abrdn Global Absolute Ret Strat R Acc  
CT European Select Rtl Acc GBP4.74 GBP0.64Rating
Invesco Monthly Inc Plus UK Acc404.45 GBP0.00Rating
M&G Optimal Income GBP A Acc237.67 GBP0.20Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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