UK-authorised investment funds saw a net retail outflow of £463m in January, according to data released yesterday by the Investment Association, the worst monthly outflow since the depths of the global financial crisis.
In terms of equities, global funds bore the brunt of this with outflows of £272m, followed by the UK which saw outflows of £158m.
Equities weren’t the worst-hit asset class overall though and only experienced a combined outflow of £58m thanks to strong performances from North America, Europe and Japan. Fixed income, on the other hand, suffered outflows of £267m in January while mixed asset funds had outflows of £157m.
Investors seemed to start 2016 with a nervous disposition following China’s growth slowdown and the collapse in commodity prices, which eventually led to a sell-off on the 11 February when the MSCI AC World index closed on a 9.54 per cent loss since the start of January.
Performance of index in 2016
Source: FE Analytics
There have also been swathes of negative commentary hitting the headlines recently, with Lord Rothschild, chairman of RIT Capital Partners, warning today that "we may well be in the eye of the storm" following the sheer volume of potential headwinds hitting markets including the impending tapering of QE, the Greek crisis, disappointing progress of US and European economies and conflict in the Middle East.
Guy Sears, Interim Chief Executive of the Investment Association, said: “Risk-on, risk-off was the theme in financial markets during January, which led to increased volatility. Unsurprisingly, this caused some investors to reduce their holdings in investment funds.” 
Hargreaves Lansdown’s Laith Khalaf (pictured) points out that the last time such a vast amount of money left funds in the Investment Association was in the throes of the financial crisis in October 2008.
However, he says that January 2016’s outflows are nothing more than a “nasty coincidence” given that all major asset classes experienced simultaneous outflows.
“We shouldn’t read too much into one month’s figures, particularly in January when tax bills have to be paid and money is thin on the ground after the annual Christmas splurge,” he pointed out.
“We will have to wait and see if this is the start of a trend or simply a seasonal blip compounded by volatile markets.”
Since 11 February, equity markets seem to have begun the slow road to recovery with the likes of the FTSE 100 on a 10.6 per cent positive return and the S&P 500 up by 9.54 per cent to-date.
Performance of indices since February 11 2016
Source: FE Analytics
Does this mean that investors have been too hasty in selling out of their investment vehicles, or was this a shrewd move given potential headwinds on the horizon across the asset classes in the months ahead?
“It’s always a real shame to see investment fund outflows in response to short-term market volatility. It suggests that some investors did not invest for the right reasons or believed they could be clever and accurately time the market bounce,” Informed Choice’s Martin Bamford said.
“Investing is for the long term, so as uncomfortable as volatility can be, you need to sit tight and ride it out. There is nothing shrewd about selling when markets have fallen. While you might protect your portfolio from further falls in the short term, you will inevitably miss out on the market recovery and potentially be forced to buy more expensive assets in the future.”
Patrick Connolly, head of communications at Chase de Vere, says that the large outflows seen in January come as absolutely no surprise to him, as he argues that many people are keen to invest when markets are performing strongly and quick to remove their money during short-term bouts of volatility.
“This is the problem with allowing greed or fear to dictate investment decisions, as many people do,” he said.
“A shrewd move would have been to take money out of markets last April. Since then most investors will have suffered losses and so by coming out now they are crystallising those losses.”
“The reality is that nobody can consistently predict market movements and so those invested in shares need to be prepared to take a long-term view and to ride out any volatility and short-term investment losses.”
Interestingly, the data from the Investment Association also shows that tracker funds saw net retail inflows of £543m in January, which is a £141m increase compared to December 2015. This trend has been continuing since last October, when inflows into passives were at £204m, and suggests that investors are losing faith in active managers’ abilities to weather choppy market conditions.
Bamford believes that passives will become more and more popular as core holdings, as he says they are good way to get cheap exposure to the main investment asset classes.
“In the current low inflation, low return environment, investors become more keenly focused on costs. There is still a place for active fund management, especially in volatile markets, but over time passive funds are likely to dominate the UK investment marketplace,” he explained.
Connolly added: “Passive funds have continued to gain popularity as many investors have become disillusioned with actively-managed funds which charge more and underperform.”
“If investors are confident that an active approach will outperform in the long term they should select actively managed funds, if they’re not confident then a passive approach is likely to be a better choice. For some investors a combination of the two may be the right approach.”
In an article published last month, Liontrust’s John Husselbee told FE Trustnet that the ongoing active/passive debate is null and void, arguing that investors should be holding both types of investment vehicles as part of a diversified and reasonably-priced portfolio.
However, he says that they should be chosen carefully based on dispersion in returns within various markets.
Regardless of how investors chose to invest their money though, Khalaf says that it is a fundamental mistake to buy when markets are strong and believes that investors shouldn’t simply pull out their money at the first sign of volatility.
“There is no shortage of bad news around right now, but if you invest when everything is smelling of roses, chances are you are paying a premium for the comfort of doing so,” he said.
“Whether it’s the EU referendum, a Chinese slowdown, a bond bubble or the Greek debt crisis, there’s usually something to worry about in financial markets. Investors who are concerned about market volatility should consider meeting their savings needs by investing monthly, which smooths the ups and downs of the stock market.”
