Why Investors are Backing Equities and ESG

VIDEO: Morningstar analyst Bhavik Parekh looks at where investors put their money in April, following record outflows from funds in the previous month

Holly Black 21 May, 2020 | 10:22AM



Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Bhavik Parekh. He is a fund analyst at Morningstar. Hello.

Bhavik Parekh: Hello, Holly.

Black: So, you've been looking at the flows data, so for the month of April. And some quite interesting trends in there. I think we might have expected people to still be very cautious after March's sell-off. But we're seeing some decent inflows.

Parekh: Yes. So, in March, we saw very high levels of outflows in particularly in fixed income. But in April, we saw very high net inflows. In particular, what I noticed was striking was that there were high net inflows into active vehicles, active funds. And there's a couple of reasons for that. One, active funds which have been popular in recent months and years, they continued to be popular in April, but they were even more popular than usual, investors added more money than they have done maybe in the past. And those funds that – active funds which have been unpopular, they were less unpopular. So, the net effect was that we saw actually a nice net inflow into active vehicles.

And from a more technical aspect, there's a number of reasons why investors maybe preferring active funds. One, if investors believe that there are areas of the market that are structurally impaired as a result of the coronavirus crisis, then active managers are clearly going to be able to avoid those areas which track funds are not going to be able to. And also, investors may like the fact that active managers have cash that they have and that they can use that cash strategically now to invest in the areas of the market where they think that there's best value, something again that track funds are not able to do.

Black: And what are we seeing in terms of people's risk appetite at the moment? Because after such a shock to the market in March, I think I would have expected people to be feeling more cautious and heading for those more protective and capital preservation focused investments. But actually, equities were quite popular in April as well.

Parekh: Yes, equities were really the driver of the inflows in April. And then, at the end of the day, I think it comes down to where investors are seeing the greatest upside potential and trying to avoid the areas where they think there's the greatest downside potential. So, if we take one of the least risky areas, which is, government bonds, the GBP government bond category has performed very well this year. It's actually about 8% up year-to-date. So, clearly, especially with interest rates being so low, it's unlikely that that category, those funds in those categories are going to perform strongly in the future. However, in the case of equity funds, especially at the beginning of April, funds were still down 20% or more and the upside potential is far higher. So, investors, I think did well to see that and not just panic and put their money in areas which they thought would be less risky.

Black: And I think another really interesting trend of the past couple of months is how popular sustainable and ESG funds have been. You might think at the moment people are just looking to maximise profits to make up for those falls in March. But perhaps the way companies are behaving at the moment is more in people's minds and is making them consider how they are putting their money to work, too.

Parekh: Yes, sustainable funds, clearly, it's a very high interest area for the market at the moment. The first four months of the – at least for U.K.-domiciled funds saw almost GBP5 billion invested in those funds. And in March, where we saw more indiscriminant selling, those funds actually came out fairly well. April, again, saw high net inflows and there's a couple of reason for that. One, sustainable funds generally perform quite well. They are not invested in areas of the market that were worst hit such as energy and basic materials and investors generally when they see good performance, then they are attracted to those funds. And also, maybe what's been going on has made investors think about rebalancing their portfolios a little bit and maybe they're still okay as a part of rebalancing maybe put a little bit more in a sustainable fund. So, that's really helped increase the flows into sustainable vehicles.

Black: Bhavik, thank you so much for your time. For Morningstar, I'm Holly Black.

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About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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