Fund flows booming, but investors turning cautious

When drilling down into the most-popular fund sectors, investors appear more bearish than bullish. 

Demand for funds remains high, but the latest statistics from the Investment Association (IA) indicate that there’s plenty of caution among investors.

Net retail sales were £5.3 billion in August, up on July’s figure of £4.8 billion. Fund sales are on track to beat the record set in 2017. In the first eight months of the year, £34.3 billion was invested in funds. In 2017, a total of £48.6 billion was invested.

But, when drilling down into the most-popular fund sectors in August, investors appear more bearish than bullish as three of the top five selling sectors house funds that invest in a defensive manner.  Those sectors are short-term money market (which attracted £625 million); volatility managed (£403 million); and targeted absolute return (£198 million).

Topping the list was global funds, which received £838 million from investors. There’s just been two months over the past year when the sector has not topped the charts. In second place was mixed investment 40-85% shares, with inflows of £656 million.

At the other end of the table, UK equity funds fell out of favour in August. with £445 million withdrawn. This is another sign that investors are turning more cautious. In July, UK funds posted inflows of £259 million.  

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Ben Yearsley, a director at Shore Financial Planning, points out that investors buying money market funds are losing money in real terms as inflation is running higher than the level of income the funds produce.

Yearsley adds that the shift by investors to defensive funds is “a risk-off move as we have had some volatility in the last few weeks and investors are starting to worry about rising rates and the impact on equity markets”.

Separate data from funds network Calastone found that for September UK equity funds remained out of favour, with outflows totalling £567 million during the month.

More than two-thirds of UK fund flows by value pass across the Calastone network each month. The group monitors transactions by UK-based investors, placing orders for funds domiciled in the UK using primarily retail investor money. 

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Edward Glyn, head of global markets at Calastone, said: “The petrol panic, soaring inflation, empty supermarket shelves, fractured supply chains, crippling staff shortages and turmoil in gas and electricity markets are all taking their toll on investor confidence. With so much going wrong so quickly, investors have voted with their feet and dumped UK assets.”

There has been plenty of speculation lately that a stock market correction could be on the cards. High up on investors’ worry lists is the Covid-19 Delta variant, higher inflation being here to stay rather than merely transient, and the prospect of the Federal Reserve in the coming months beginning the process of unwinding its stimulus programme, so-called tapering (which has helped prop up asset prices, including stock markets)