Retail fund sales fell by £41bn in 2018, according to data from the Investment Association, leading experts to warn investors could be selling out at the worst possible moment.
2017 saw a record-breaking year for fund sales, with a net figure of £48.5bn, as the market rallied across the board and volatility remained low. However, this figure fell to just £7.2bn in 2018 as the MSCI World saw its worst year since 2011 and the FTSE All Share had its worst year since 2008.
Performance of indices in 2018
Source: FE Analytics
“Total fund flows have only been significantly worse during the financial crisis than in 2018,” said Laith Khalaf, senior analyst at Hargreaves Lansdown. “Our own investor confidence index repeatedly plumbed record lows in 2018, and continues to be weak today.”
He noted the lion’s share of the damage was sustained in the final quarter of 2018, when retail investors collectively withdrew £6bn from funds and the two indices above both saw double-digit losses.
Source: Hargreaves Lansdown/The IA
Laura Suter, personal finance analyst at investment platform AJ Bell, pointed out there was a noticeable exodus at the very end of the year, when the FTSE and MSCI World indices bottomed out.
This suggests many investors are buying high and selling low when they should be doing the opposite to maximise returns.
“Asset managers were faced with a sea of red in December as investors pulled back sharply from investment markets, withdrawing a total of £1.65bn from funds in the month,” said Suter.
“Equity funds saw their highest outflows in more than two years, as investors pulled £875m. Every major equity market saw outflows, with investors withdrawing £445m from European-focused funds, £259m from North American funds and £110m from emerging market funds.”
UK equity funds led last year’s descent, accounting for £4.9bn of outflows, with IA UK All Companies now the worst-selling sector for five years on the trot. A total of £12.9bn has been withdrawn from UK equity funds in the last three years alone.
“UK equities continue to be at the eye of the storm, witnessing large, consistent outflows as investors react to Brexit uncertainty by withdrawing their money,” said Khalaf. However, he said that the UK market’s unpopularity has created value opportunities for adventurous investors who are willing to look through Brexit volatility.
“However difficult it might seem right now, investors should focus on their long-term goals, because we will eventually leave Brexit in the rear-view mirror,” he added.
“With uncertainty comes opportunity, and if there is an orderly withdrawal from the EU, we would expect the exodus from UK equity funds to go into reverse, and some deeply unloved UK domestic stocks to rally.
“That’s far from certain, to say the least, but investors should make sure their portfolio is evenly spread, so all their eggs aren’t in one Brexit basket.”
There was also a big swing in fixed interest fund sales, from a positive inflow of £16.2bn in 2018 to an outflow of £2bn in 2018, the worst performance in the last decade.
Khalaf noted flows into other regions have been more positive, with Asian equity funds seeing a renaissance in popularity after a number of years in the wilderness.
He said this is more encouraging as Hargreaves’ long-term valuation analysis suggests Asia-Pacific markets look attractively priced.
Mixed asset funds also had a decent year, posting £7.9bn of retail inflows in 2018.
IA sectors by assets under management
Source: The IA
“Savers’ preference for risk diversification was evident in sales for mixed asset funds; the only asset class that consistently attracted monthly inflows in 2018,” said a statement from the Investment Association.
“It was further reflected in the continued positive sales of IA Volatility Managed funds, which proved to be the most popular type of outcome-oriented funds. On the other hand, the IA Targeted Absolute Return sector experienced several months of outflows, particularly in the last quarter.”
Aside from flows into and out of individual sectors, Khalaf noted another big trend was the rise of index investing, which has seen tracker funds continue to eat up market share.
“This can be put down to increasing awareness of these strategies, combined with razor sharp pricing in some key products, and the continued roll-out of automatic enrolment in company pension schemes,” he explained.
“Indeed, the automatic enrolment programme can claim some credit for the steady flow of money into mixed asset funds too.”
The analyst also pointed out ethical fund sales gained momentum in 2018, which may mark an inflection point for the sector, which had previously failed to make serious inroads.
“ESG [environmental, social & governance] credentials are now high up the priority list for UK boardrooms, and more traditional fund managers are also sitting up and taking notice of this trend,” he said.
“Investors likewise seem to be responding to increased scrutiny of the societal impact of corporate activity.”