Growth was the key term to describe fund flows as well as markets in 2020, even though the Investment Association (IA) universe initially experienced some of the sharpest outflows on record as the Covid crisis hit.
This is according to the latest Investment Management in the UK report, based on the organisation’s own data and a survey of IA member firms. For 2020, 74 members responded, representing 85% of total assets under management (AUM) in the IA universe.
At the end of 2020, total AUM reached £9.4trn, an 11% increase on 2019. This continued the long-term growth trend from previous years.
Source: Investment Association (IA)
The IA said: “This was despite the significant turbulence during H1 amid the intensifying Covid-19 crisis.”
Source: Investment Association (IA)
Chris Cummings, chief executive of the IA, said: “The investment management industry demonstrated its long termism through the pandemic by supporting the companies it invests in.”
The IA added that this growth was also down to the quick adaptation to working from home and the “crucial interventions” from central banks, both of which supported businesses.
This isn’t to say that the industry had an easy ride though. March 2020, the heart of the Covid-19 crisis, saw the biggest outflows on record, £9.7bn, equivalent to the entire market inflows in 2019.
The Fixed Income sector experienced the biggest outflows during March, at £7.4bn, accounting for 78% of all withdrawals.
But the outflows were rapidly returned, and with interest, with net sales for the IA universe reaching £30.8bn by the end of year, the second highest figure on record. November was the biggest monthly contributor, when net retail sales reached £8.3bn due to positive momentum generated by the roll-out of effective Covid-19 vaccines.
Looking ahead, the IA said that there is significant uncertainty on whether the strong recent inflows in the UK will be maintained.
High levels of household savings built up during the various Covid lockdowns and record low interest rates “may well drive positive retail fund flows,” it said.
But these are tenuous factors and the macroeconomic picture remains unclear, with little certainty over the direction of inflation or interest rates in the long term.
If rising inflation were to persist and become more aggressive than the Bank of England’s ‘transitory’ forecast, the IA said this could cause investors to cut their allocation to bonds and see them turn towards alternative assets such as gold or commodities to hedge against rising prices.
Two major themes emerged in the growth in flows last year: active funds regained their popularity and sustainability emerged in a substantial way.
Investors showed enthusiasm for active funds while maintaining an appetite for passive portfolios.
Source: FE Analytics
In 2019, active funds experienced £8.1bn in outflows and net rail sales were outpaced by passive options. In 2020, though, sales of active funds recovered, with £12.4bn of net inflows.
Yet passive options remained popular. For example, unlike active funds, these experienced inflows in March 2020, with a figure of £469m.
ETFs remained among investors’ favourite vehicles in 2020. Global AUM in ETFs reached $7.9trn by the end of the year, a 25% increase on 2019. This is slightly below the 30% growth rate seen in 2019, but still outpaced the 19% annual growth rate for the past decade.
On the second theme, the IA found that the growth in AUM and net retail sales into responsible investment (RI) funds was “one of the standout developments of 2020”.
Cummings said: “We saw the acceleration towards a greener economy as retail investors placed record funds into responsible and sustainable investments, seeing a new generation embracing investing.”
Source: IA
Investors’ desire for environmentally and socially conscious funds has been building over recent years but gained momentum in 2020 as the pandemic brought social concerns to the fore. Net retail sales to RI funds reached £11.7bn last year, the IA found.
The total percentage of UK investor AUM in RI funds “remained small” at 3.9% for 2020, but this was a 2.6% increase on 2019.
These portfolios also benefited from the general underperformance of commodities, oil and energy – sectors RI funds typically avoid – and the outperformance of technology and healthcare, “core sectors to RI funds”.
This part of the market also saw some of the highest new fund launches, as asset managers tried to cash in on the trend. The number of RI funds in the IA grew 17%, from 193 to 226.
Most RI fund flows went into equity vehicles, at £5.6bn, making it the most popular asset for accessing sustainable investments. Mixed-asset vehicles captured £3.7bn of RI inflows and fixed income £2.1bn.
Cummings concluded that: “This year’s report shows an industry operating in an era of extensive challenge, but one which has shown itself able to adapt to the most difficult of circumstances.”