February Fund Flows Analysed

VIDEO: Allocation funds are in favour, and UK equities out, but it's Baillie Gifford which is the runaway success story this month 

Holly Black 19 March, 2021 | 9:10AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Bhavik Parekh. He is from the Manager Research team at Morningstar. Hello.

Bhavik Parekh: Hello, Holly.

Black: So, Bhavik, you do our monthly fund flows report. Can you tell me what were investors doing with their money in February?

Parekh: So, there's two key trends that I wanted to highlight. First of all, sustainable funds. Now, I think every time we do one of these videos, Holly, I always talk about sustainable funds, but their dominance is just so prevalent that I can't help but talk about them. In February, investors added £2.5 billion to these funds, which, if you consider the fact that currently they represent less than 10% of assets and also the entire market as a whole on aggregate only added £2 billion, clearly, investors are very interested in these funds and very keen to allocate to them. And I think it's very unlikely we'll see a drop off in that anytime soon.

And the other one was investor interest in allocation funds, so allocation funds or multi-asset funds. Since the summer investors have added at least £1 billion every month since then, and I think that there's a couple of reasons for that. One, investors like the risk-adjusted returns that you can get from these funds. They are not quite as risky as equities, but they are more than fixed income. And second of all, asset managers have been quite keen to market them as it's a growing area and they can charge active level of fees whereas in the equity or fixed income investments where they can charge the higher margin fees that are perhaps having outflows from those funds.

Black: Okay. So, I'll forgive you for always talking about sustainable funds if you forgive me for always asking about UK equity funds because they've been out of favor for ages. But the economy is about to unlock with the vaccines being rolled out, are investors back in love with UK equity funds yet?

Parekh: I wouldn't say that that was the case. Obviously, UK equities have had a fairly wild ride over the last couple of years. But from the beginning of the November, obviously, with the vaccine news, the U.K. market in terms of equities at least has been one of the best-performing markets. So, it was a little unexpected to see £2 billion plus withdrawn from the UK equity funds. But there's perhaps a couple of explanations for that. Investors may have used this sudden bump in their investments to use that as a good opportunity to take some profits or sell down. Maybe they're still frustrated overall how UK equities have performed over the last few years and maybe even with successful vaccine rollout and better prospects overall for the UK economy, they're still not that excited about them. So, it might be a while until we see UK equities back in favor again.

Black: Now, as well as looking at the types of funds that people are and aren't investing in, you look at the fund houses and there's really been one runaway success story recently and that's Baillie Gifford. So, what's going on there?

Parekh: Yeah. So, Baillie Gifford has really been in a sweet spot over the last few years. They specialise in growth style equity and many of their portfolios have quite a strong style bias and that's acted as a very big tailwind in the last few years, especially last year. But last month, in February, they had one of their best ever months. They added £1.5 billion, which I was definitely surprised to see. Firstly, we've had a little bit of a value rotation since that vaccine news in November, which I thought might have put off investors. And secondly, generally, as research has shown, in the past when funds have performed even 100% returns in one year, often the period that follows that, they usually underperform. So, at this point for investors to be adding so heavily to growth style equity seems a little strange to me. But we've been wrong about growth style and Bailey Gifford in the past. So, I'm not going to hold my breath on that one.

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

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Holly Black  is Senior Editor, Morningstar.co.uk