The fund sectors bucking the trend as investors hit sell

Most fund sectors have posted outflows throughout 2022, a trend that continued in October. 

Investors continued to ditch funds in October, meaning it was the ninth month of outflows in 2022.

The only month when more money was invested than withdrawn was April, and that would have been influenced by early bird ISA investors at the start of a new tax year.

In October, £3.7 billion was pulled out of funds. This was an improvement on September, when £7.6 billion was withdrawn. Almost £26 billion has left funds year-to-date.

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To put those figures in context, over the past decade, every year there’s been inflows into funds, with more money invested than withdrawn. In 2021, £43.6 billion was invested, which was the second-best year after 2017 when inflows totalled £48.6 billion.   

So, it is highly unusual to see this amount of money exiting funds, and the consistency of the outflows.

There’s no shortage of headwinds giving investors cause for concern, including the Russia/Ukraine war, inflation being at its highest level in decades, interest rates rising, and signs of a slowdown in China’s economy. In addition, US equites have been firmly out of favour this year, particularly technology companies.

Most fund sectors have posted outflows throughout 2022. The worst-selling sector over the month, losing £914 million, was Targeted Absolute Return.

However, a small number of sectors and asset classes bucked the trend. The best-selling sector in October was corporate bond funds, which saw sales of £879 million. Government bond funds also proved popular as the third best-selling sector, taking in £222 million.

The bond market-sell off that’s taken place in 2022 in response to interest rate rises caused bond prices to fall significantly. However, for new investors the silver lining is that bond yields, which move inversely to bond prices, have been on the rise and are now at their most attractive levels for several years.

The second best-selling sector was short-term money market funds, which attracted £875 million. This sector tends to benefit when investors are cautious as such funds are a cash-like investment.

Also bucking the trend were property funds, the volatility managed fund sector, and Japan equity funds, which all saw a small amount of inflows in October.

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All other equity funds posted outflows. The three most unpopular equity sectors were UK, global and Europe, which saw respective outflows of £792 million, £737 million and £537 million.

While actively managed funds are struggling to attract and retain investors, the same cannot be said for tracker funds. Passive strategies posted net retail inflows of £1.4 billion in October. Their overall share of industry funds under management is now 20.5%.

This same trend is playing out among interactive investor customers. For the past couple of months, just one actively managed fund, Fundsmith Equity, has been in our top 10 most-bought funds list.

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In contrast, there’s been plenty of chopping and changing among investment trusts. Over the course of 2022, just two investment trusts have consistently kept their places in the top 10: Scottish Mortgage (LSE:SMT) and City of London (LSE:CTY).

Scottish Mortgage, which invests in businesses aiming to deliver high growth in the years to come, has consistently occupied the top spot since June 2019, with its recent performance woes not denting its popularity.

The other trust that’s been in the top 10 all year is City of London, which predominately invests in FTSE 100-listed dividend paying companies. The trust, which has been managed by Job Curtis since 1991, has raised its dividend for 56 consecutive years. It offers a high dividend yield today, of 4.9%.

In November, there were four new entries: BlackRock World Mining Trust (LSE:BRWM), VinaCapital Vietnam Opportunities (LSE:VOF), Polar Capital Technology (LSE:PCT) and NewRiver REIT (LSE:NRR). 

When more investors sell than buy, fund managers have to raise cash

As funds are “daily dealing”, when there’s more sellers than buyers the fund manager has to raise cash to redeem investors by either using the cash they have on hand in the fund, or reducing or selling some of its underlying holdings.

Most funds are “liquid”, meaning that investors should not have problems withdrawing their money.

Liquidity is basically a fund’s access to liquid assets, for example, cash, or those assets that can be quickly and easily converted to cash.

Most funds are highly diversified and hold a wide spread of investments that are listed on a stock market, so they are unlikely to have liquidity problems.

For funds investing in large global companies that are liquid (easy to buy and sell), meeting investor redemptions is usually not a problem. The opposite, however, is true when a fund invests in illiquid companies that are harder to sell, such as unlisted companies, which led to the downfall of Neil Woodford.

Property problems

Investors in commercial property funds are particularly vulnerable when there’s a short-term period of heavy selling. Such funds have put suspensions in place on several occasions, including following Covid-19, the Brexit vote and during the financial crisis.

In normal market conditions, it is not a problem for investors to withdraw money on a daily basis, as a portion of the portfolio remains in cash, typically 10% to 20%.

However, during times of heavy selling, it is a different story, as the cash buffer is depleted. This makes it difficult for open-ended commercial property funds to meet withdrawals on a day-to-day basis.

This is because property sales of the shops, offices and factories held in portfolios are not quickly or easily arranged, particularly in times of market uncertainty, and it is therefore very difficult to raise money quickly.

Such a scenario can negatively impact investors who remain in the fund, as the manager is forced to sell investments for less than they are worth to gather enough money to repay investors who have hit the sell button.