Funds take another monthly hit but confidence rises

The Investment Management Association’s investment funds statistics for December show yet another month of outflows from British domiciled funds. The month saw net retail outflows totalling £377.4m as investors continued to withdraw money from the sector. Individual Savings Accounts (Isas) were among the month’s success stories, however, as they turned around a £50m net outflow in November to see a net inflow of £17m.

Despite this, Simon Elliott, investment trust analyst at Wins Research, says that the December statistics give the fund management industry little to be positive about.

“Clearly the figures speak for themselves,” he says. “It’s not great news and we suspect that it will continue into January given the continued volatility in financial markets.”

Elliott says that investors have not yet begun to reinvest the capital they are getting from the high level of redemptions back into funds. Instead, he says, the money “is flowing into cash-oriented stocks”.

The most popular retail sector was Cautious Managed as investors’ dwindling appetite for risk caused them to reduce their exposure to higher risk equities. The sector received an inflow of just under £130m while Active Managed funds had outflows of more than £24m in the month.

While British domiciled funds suffered a torrid time during the Christmas period, the fortunes of overseas domiciled funds improved. The funds went from seeing large outflows in November to finishing the year with a net £11.6m coming into the sector.

The behaviour of investors during the turmoil was entirely foreseeable says Peter Hargreaves, chief executive of Hargreaves Lansdown. “Outflows are going into cash, which is nothing new,” he says.

“In general, when markets are volatile and we see great losses investors initially think that they can see bargains and start buying. This soon fades away, however, and people start to sit on their money until they perceive the market stabilising.”

The threat of interest rate cuts has meant that keeping money in building societies becomes much less attractive, however. Investors may be averse to risk but there is still a desire to generate returns, albeit on a smaller scale than in recent years.

Hargreaves says that investors “tend to put most of their money into secure investments but they invest small amounts quite speculatively, in areas such as emerging markets.”

The Investor Confidence Index compiled by Hargreaves Lansdown shows that the investors surveyed are about 5% more bullish in January than they were last month (see chart) despite the market volatility.

The results may demonstrate a belief among investors that the market has already bottomed out and more buying opportunities could present themselves, Hargreaves says. This is not to suggest that money is imminently poised to flood back into the market, he says, but that investor sentiment is undergoing a recovery from the all-time lows the confidence index showed in December.

The problem, says Hargreaves, is that “there is not an early correlation between what investors think and what they do”. This may mean that even though investor confidence is building, they are likely to hold back on moving the majority of their capital into financial markets until the market shows signs of recovering over the longer term.

The fund management industry, therefore, is unlikely to see the benefit of the rising confidence levels in January.

Peter Hicks, head of IFA Channel at Fidelity International, is sceptical about the claim that confidence is rising.

“We’ve seen a good level of sales at Fidelity in January,” he says, “but a lot of that has been in fixed-income products and the cash fund.”

“If people are using the volatility to remind themselves that diversification is important then I would see that as the most positive thing.”