Volatile markets this year have caused investor behaviour to be just as skittish. In a U-turn from the previous month, investors withdrew some £1.3 billion from UK-domiciled funds (excluding money market funds) in June, latest Morningstar figures reveal. Equity funds took the brunt of redemptions, with £2.1 billion bled from this asset class alone in a signal that investors may believe the recovery is over - at least for now.
After falling out of favour in April, fixed income have enjoyed a reversal in sentiment - the group attracted net flows of £1.2 billion last month, as the likelihood of interest rates being cut further from their current record low of 0.1% eased.
“This change in sentiment resulted from a better short-term outlook for bonds and weaker medium-term prospects for equities, as economies fail to bounce back as quickly as some people ad forecast,” says Morningstar associate analyst Bhavik Parekh.
Despite this, lower risk assets such as money market funds, which usually see increased interest when investor are nervous, did not see a pick up in flows. The category has been popular in recent months as investors have looked to reduce their exposure to the stock market, but low interest rates make the potential returns on offer incredibly small.
Meanwhile, alternative funds saw an outflow of £900 million in June. However, this was skewed by figures from the Neutral-rated Invesco Global Targeted Returns, which saw its second-highest month of net outflows ever, at about £1.2 billion. At the halfway point in 2020, the absolute return fund has seen outflows totalling almost £2 billion.
“Throughout the turbulent market period, allocation funds have remained relatively unscathed, and had a net outflow only in March,” points out Parekh.
Growth and ESG Funds in Favour
Not all equity funds were out of favour, however, and those with a growth tilt have continued to enjoy inflows throughout the year. The Silver-rated Rathbone Global Opportunities fund, for example, was among the most popular of the month, albeit with rather muted inflows of £143 million. The fund has around 60% of its assets in the buoyant US market including growth giants such as Amazon and Paypal.
“This fund has performed very well this year, outperforming the category benchmark by 15% to the end of June," says Parekh. It highlights the stark difference in performance this year between growth-style strategies and value or blended funds, he adds.
Tracker funds and ESG options have been popular options for investors; Bronze-rated Royal London Ethical Bond and five-star rated Rathbone Ethical Bond attracted net inflows of £140 million between them in June.
“The number of ethical or sustainable bond funds in the UK market is limited, but these two offerings are among the most established, so investors searching for an ethical bond mandate are likely to come across these first,” says Parekh.
But while developed markets have strongly recovered from the March sell off, the UK market is still lagging. While that means some stocks are looking undervalued, it also means investors are turning away; the UK equity income category lost £591 million in June, a sharp turnaround from three months of positive flows into the group.
Indeed, every UK equity category saw outflows in June, Parekh points out "as investors grow more concerned about Brexit and the speed of an economic bounceback seems to be slower".
Flows by Fund House
In June, Baillie Gifford had its highest monthly net inflow in two years at £691 million, thanks to the strong performance of its growth-orientated equity funds. In particular, five-star rated Baillie Gifford European saw £228 million in subscriptions, the highest of any UK-domiciled fund in June.
Recently, investors looking to invest in Europe have primarily been choosing funds with a growth bias, and Baillie Gifford European is no exception. “This year to the end of June, the fund outperformed its benchmark by more than 17 percentage points in sterling terms and has even beaten the equivalent growth-style benchmark by almost 10 percentage points," says Parekh.
Invesco, meanwhile, continues to grapple with outflows, suffering its second-highest monthly outflow ever in June, as investors took £1.2 billion elsewhere. Fund houses with a lack of passive or growth-style funds also saw outflows in June: Schroders, Columbia Threadneedle, and BNY Mellon, racked up a combined net outflow of £1.3 billion. Parekh adds: “Even in cases where the funds at these houses are meeting expectations, these types of offerings are simply out of favour with investors at the moment.”
Meanwhile, passive specialist Vanguard continues to amass assets and, even though UK equity funds were unpopular in June, Gold-rated Vanguard FTSE UK All Share Index saw a net inflow of £83 million because it has proved itself to be highly defensive, rarely seeing outflows regardless of market conditions. BlackRock, on the other hand, saw a small net outflow (134 million), from both its active and passive options.
